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Chartered  Banking 


IN 


Rhode  Island    , 


1 791-1900 


BY 


HOWARD    KEMBLE    STOKES,    Ph.D. 


Providence,  R.  I. 

Preston  &  Rounds  Co. 

1902 


^I^NERAL 


BY  THE  Same  author 
Public  Finances  of  Rhode  Island 

In  press 

The  Finances  and  Administration 

OF  Providence,  1636-1900 


Reprinted  for  the  author 
from  "  rhode  island  and 
providence  Plantations  at 

THE  end  of  the  CENTURY," 
BY  PERMISSION  OF  THE  MASON 
PUBLISHING       COMPANY 


Copyright  1901 
The  Mason  Publishing  Co. 


PREFACE. 


The  words  "Chartered  Banking"  have  been  selected  as  a  part  of 
the  title  of  this  monograph  for  two  reasons:— first,  because  the  state 
itself  engaged  in  non-chartered  banking  during  the  years  1710-1786, 
when  it  issued  a  credit  currency  and  made  loans  on  notes  with  mort- 
gage security  as  collateral.  I  have  described  these  phases  of  banking 
in  Rhode  Island  in  connection  with  the  history  of  the  public  finances  of 
the  state  in  another  monograph.  Second,  because  I  have  discussed  in 
this  monograph  banks  chartered  under  the  national  banking  law  as 
well  as  those  chartered  under  state  law,  and  have  also  presented  some 
reasons  for  the  supplanting  of  the  state  banking  system  by  the  national 
banking  system,  and  the  partial  supplanting  of  the  latter  by  the  more 
modern  state  trust  company  system.  The  Author. 


108053 


S     c  t- 


>.  ii 


y    ^ 


03    ii 


CHARTERED  BANKING  IN  RHODE  ISLAND. 

[Chartered  banks  in  Rhode  Island  have  had  a  peculiarly  close  asso- 
ciation with  the  industry  of  the  state.  Their  history  cannot  be  under- 
stood apart  from  their  appropriate  setting  in  the  local  economic  devel- 
opment. This  chapter  will  therefore  be  divided  into  four  sections 
beginning  respectively  with  the  years  1791,  1809,  1840  and  1865.  The 
first  period  was  characterized  by  banking  free  from  state  supervision 
and  by  industry  confined  to  commerce  and  agriculture.  The  second 
was  a  period  of  banking  restricted  by  state  supervision  and  industry 
almost  wholly  devoted  to  manufacturing.  The  third  period  was 
marked  by  some  degree  of  inflation  incident  to  gold  discoveries  and  the 
civil  war  and  consequent  further  restrictions  in  banking  and  by  indus- 
try reorganized  by  the  use  of  steam  power  and  carried  on  by  incorpo- 
rated companies  instead  of  co-partnerships.  The  fourth  period  has 
been  marked  by  the  importance  of  deposits  and  trust  companies  in 
banking  and  a  reorganization  of  industries  due  to  better  methods  of 
credit  and  improved  mechanical  devices.] 

First  Period.— 1791-1809. 

Rhode  Island  was  not  among  the  first  states  to  undertake  the  role  of 
a  banker,  but  it  drank  deeper  and  longer  than  they  of  the  cup  of 
inflation,  repudiation  and  dishonor.  At  the  close  of  the  Revolution, 
it  was  said  that  "punctuality  in  business  engagements  was  observed 
nowhere  outside  of  Philadelphia",^  and  Rhode  Island  customs  and 
traditions  had  been  such  that  the  statement  was  particularly  applicable 
to  it.  The  economic  condition  of  the  people  did  not  warrant  the  hope 
of  success  in  a  private  banking  enterprise.  The  state  was  impover- 
ished by  the  war,  the  soil  had  been  exhausted  by  the  demands  made 
upon  it  and  many  of  the  inhabitants  were  emigrating  to  the  more 
fertile  lands  of  the  west.  Trade  was  dull,  the  limited  territory  which 
was  tributary  to  the  towns  offered  by  no  means  a  hopeful  prospect  to 
those  who  remained.     The  two  factors  of  encouragement  were  world- 

'Gallatin's  Works,  iii,  370. 


2  Chartered  Banking  in  Rhode  Island. 

wide  commerce  of  the  merchants  (the  fitting  of  the  first  ship  for  the 
East  India  trade  occurred  in  1787),  and  the  beginnings  of  the  cotton 
industry  in  1790.  At  this  time  there  were  only  four  banks  in  the 
states— one  each  in  Boston,  New  York,  Philadelphia  and  Baltimore. 
Providence  was  far  behind  any  one  of  these  cities  in  wealth  or  popula- 
tion or  prospects. 

The  first  attempt  to  start  a  bank  in  the  state  was  made  in  March, 
1784.  The  project  had  been  discussed  in  the  public  press  and  the 
advantages  of  such  an  institution  had  been  ingeniously  advertised  by 
the  promotors.  The  Bank  of  America  in  Philadelphia  was  cited  as  an 
illustration  of  the  opportunities  for  investment  which  banking  offered. 
The  stock  of  that  bank  was  in  great  demand  and  a  semi-annual  divi- 
dend of  eight  per  cent,  had  been  paid  on  it  in  January.  The  proposed 
bank  was  to  be  called  the  Bank  of  Rhode  Island  and  Providence  Plant- 
ations. Its  capital  was  fixed  at  $150,000,  and  the  par  value  of  the 
shares  was  $300.  Ex-Deputy  Governor  Jabez  Bowen,  John  Jenckes 
and  John  Brown  were  to  receive  subscriptions,  but  despite  the  com- 
manding influence  of  such  men,  the  plans  failed.  Only  $30,000  was 
subscribed  at  a  meeting  held  at  the  state  house.  The  meeting  ad- 
journed to  assemble  in  a  few  days  at  "Mr.  Rice's  tavern".  Of  that 
assemblage  there  is  no  record,  save  that  many  of  those  who  had  not 
subscribed  before,  and  among  them  Moses  Brown,  were  invited  to 
attend.  Economic  conditions  were  not  ripe  for  the  enterprise.  There 
was  very  little  capital  available  for  it,  and  it  probably  did  not  com- 
port with  the  business  acumen  of  the  Brown  brothers  to  attempt  to 
build  a  bank  on  stock  notes,  as  subsequently  became  common.  The 
plan  for  a  bank  lay  dormant  for  seven  years. 

In  June,  1791,  it  was  revived,  this  time  apparently  by  the  firm  of 
Brown  &  Francis,  of  which  John  Brown  was  a  partner.  Brown  was 
in  Philadelphia  at  the  time  and  he  had  been  urged  to  get  a  branch  of 
the  United  States  bank,  then  forming,  established  in  Providence,  but 
he  found  such  a  scheme  impracticable.  He  advised  his  brother  that 
the  establishment  of  a  local  bank  would  be  the  most  effective  method 
of  inducing  the  United  States  bank  officials  to  think  the  town  entitled 
to  a  branch.  He  believed  the  time  a  fitting  one  for  the  enterprise, 
although  the  town  was  small  and  the  field  limited,  "but",  he  wrote, 
"by  our  exertions,  and  favoring  a  good  and  substantial  foundation  for 
the  commercial,  manufacturing  and  mechanical  rising  generation,  it 
may  in  time  become  no  inconsiderable  capital,  but  without  a  spring  to 
promote  our  young  men  in  business  here  they  must  and  will  continue 
to  go  to  such  places  as  will  aid  them  with  the  means  of  business ;  and  in 
short  all  our  wealth,  I  mean  the  wealth  as  fast  as  acquired,  in  this  state 
must  be  transferred  to  other  states,  who  by  their  banks  promote  all  the 
valuable  arts  of  mankind".^     This  paragraph  was  typical  of  the  lives 

'Moses  Brown  Papers,  August,  Sept.  and  Oct.,  1791. 


Chartered  Banking  in  Rhode  Island.  3 

of  John  and  Moses  Brown.  Their  zeal  for  all  kinds  of  local  improve- 
ments seemed  almost  untiring.  For  nearly  four  months  they  were 
maturing  the  details  of  their  plan  and  comparing  it  with  the  charters 
and  regulations  of  the  then  existing  banks  of  this  country  and  those  of 
the  Bank  of  England.  They  favored  a  small  bank  and  limited  capital 
of  only  $100,000,  but  finally  decided  to  increase  the  latter  in  order  to 
enlist  subscribers  from  outside  the  state ;  while  to  encourage  those  of 
limited  means  a  disproportionately  large  vote  was  proposed  for  the 
small  stockholder  and  the  voting  power  of  any  individual  or  corpora- 
tion was  limited.  It  was  also  thought  advisable  to  pattern  as  nearly 
as  possible  after  the  United  States  Bank.  -As  a  further  inducement 
to  subscribers,  it  was  stated  that  "the  institution  is  pleasing  to  the 
secretary  of  the  treasury  of  the  United  States  and  that,  therefore, 
every  reasonable  encouragement  from  him  may  be  expected".^  The 
stock  was  limited  to  $250,000—625  shares  of  $400  each.  Of  this  sum 
$50,000  was  for  a  time  reserved  for  the  United  States  and  $20,000  for 
the  state.  Neither,  however,  subscribed.  Other  investors  were  ready. 
Thirteen  hundred  and  twenty-four  shares,  or  nearly  three  times  the 
stock  allotted  to  private  parties,  were  at  once  subscribed.  Capitalists 
and  corporations  from  the  state  and  the  neighboring  states  and  from 
Boston  and  New  York  sent  in  their  offers.  Only  $180,000  of  stock 
was  allowed,  and  the  subscriptions  of  non-residents  were  reduced  the 
most.  The  charter  of  the  Providence  Bank  was  granted  by  the  general 
assembly  October  3,  1791. 

As  this  charter  was  the  model  of  bank  charters  for  many  years,  it 
deserves  careful  consideration.  The  preamble  contains  the  following : 
' '  Taught  by  the  experience  of  Europe  and  America  that  well  regulated 
banks  are  highly  useful  to  society,  by  promoting  punctuality  in  the 
performance  of  contracts,  increasing  the  medium  of  trade,  facilitating 
the  payment  of  taxes,  preventing  the  exportation  of  specie,  furnishing 
for  it  a  safe  deposit,  and  by  discount  rendering  easy  and  expeditious 
the  anticipation  of  funds  on  lawful  interest,  advancing  at  the  same 
time  the  interest  of  the  proprietors",  etc.  The  incorporators  were 
empowered  "to  have,  purchase,  receive,  possess,  enjoy  and  retain, 
lands,  rents,  tenements,  hereditaments,  goods,  chattels  and  effects  of 
what  kind  or  nature  soever;  and  to  seU  and  dispose  of  the  same,  to 
sue  and  be  sued,  plea  and  implead." 

Practically  no  limitations  were  put  upon  its  corporate  powers, 
except  that  within  the  corporation  itself  the  directors  were  to  do  noth- 
ing contrary  to  the  regulations  of  the  stockholders. 

No  specific  clause  conferred  the  right  to  issue  bank  notes,  although 
it  was  implied  in  the  clauses  providing  for  an  official  examination  of 
the  notes  issued  and  redeemed  and  in  the  clause  providing  a  penalty 
for  counterfeiting  notes.     The  issue  of  bank  notes  seems  to  have  been 

'Providence  Gazette,  Oct.,  1791. 


4  Cpiartered  Banking  tn  Rhode  Island. 

considered,  here  as  elsewhere,  a  common  law  right.  The  stock  was  to 
be  paid  for  in  installments  covering  a  period  of  nine  months— two- 
fifths  in  silver  or  gold  and  three-fifths  in  funded  stock  of  the  United 
States.  The  voting  power  of  the  stockholders  did  not  correspond  to 
the  number  of  shares  held.  The  holder  of  one  or  two  shares  had  one 
vote,  two  additional  shares  were  required  for  every  additional  vote  for 
holdings  between  two  and  ten  shares ;  four  additional  shares  for  hold- 
ings between  ten  and  thirty;  six  additional  shares  for  holdings 
between  thirty  and  sixty;  eight  additional  shares  for  holdings 
between  sixty  and  one  hundred,  and  ten  additional  shares  for  holdings 
above  one  hundred  shares.  Thus  the  holder  of  100  shares  had  only 
twenty  votes ;  the  holder  of  200  shares  had  thirty  votes,  which  was  the 
maximum  number  allowed  to  any  one. 

The  directors  had  entire  charge  of  the  business  of  the  bank  ' '  for  the 
interest  and  benefit  of  the  proprietors",  and  they  were  to  declare 
dividends  at  least  once  in  six  months.  They  were  .  to  receive  no 
"pecuniary  advantage"  for  their  services  unless  the  profits  exceeded 
six  per  cent.  net. 

The  bank  was  required  to  receive  all  sums  of  money  for  safe  keep- 
ing, and  to  pay  them  out  on  order  of  the  owner  without  charge.  The 
liability  of  the  stockholder  was  limited  to  the  amount  of  the  stock  held. 

The  so-called  "bank  process"  was  granted  to  the  bank.  Under  it 
when  an  obligation  to  the  bank  fell  due,  the  president  or  three  direc- 
tors gave  legal  notice  to  the  debtor,  and  on  making  oath  before  the 
clerk  of  the  court,  the  latter  vv^as  required  to  enter  judgment  against 
the  defendant  and  issue  execution  without  the  usual  intervening  legal 
process  of  trial ;  but — and  the  modifications  are  important— the  debtor 
was  allowed  ten  days'  grace  before  execution  issued,  and  if  upon 
receipt  of  legal  notice  he  denied  the  legality  of  the  debt  or  any  part  of 
it,  he  was  accorded  all  the  privileges  of  regular  trial.  The  full  force 
of  this  provision  appears  when  taken  in  connection  with  the  rule  of 
the  Providence  Bank  that  discounts  should  be  offered  for  thirty  days 
only. 

The  bank  process  was  peculiar  to  Rhode  Island.  It  gave  to  the 
banks  a  speedy  remedy  against  debtors  not  granted  to  other  creditors. 
It  did  not  provide  an  equally  summary  remedy  against  the  bank  in 
case  it  should  default.^ 

'The  provisions  of  the  bank  process  must  not  be  confused  with  the  pro- 
visions of  the  present  bankruptcy  act,  under  which  all  legal  procedure  look- 
ing toward  judgment  obtained  by  one  creditor  is  voided.  The  provisions 
for  insolvency  were  those  of  the  common  law.  The  act  of  insolvency  then  in 
force  was  that  of  1756.  Assignment  did  not  void  previous  legal  procedure 
begun  by  an  individual  creditor.  Hence  the  bank  process  did  not  confer 
upon  the  banks  any  extraordinary  exclusive  powers  as  compared  with  other 
creditors.  It  simply  accelerated  legal  procedure  and  avoided  delay  in  case 
of  an  acknowledged  debt. 


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6  Chartered  Banking  in  Rhode  Island. 

In  the  second  bank  charter  granted  by  the  general  assembly,  that  of 
the  Bank  of  Rhode  Island  of  Newport  in  1795,  "the  process"  con- 
tained no  clause  providing  ten  days  of  grace  before  judgment  was 
granted.  This  more  summary  power  was  conferred  on  all  subsequently 
chartered  banks  until  1818,  and  in  1807  the  charter  of  the  Providence 
Bank  was  amended  to  the  same  effect. 

This  law  has  been  the  subject  of  much  criticism.  It  has,  however, 
an  historical  setting  and  some  economic  relations,  without  an  under- 
standing of  which  it  has  seemed  strange  to  some  and  exceedingly  un- 
just to  others.  Its  setting  and  relations  were  as  follows :  The  spirit 
which  prompted  the  founding  of  the  Providence  Bank  was  voiced  in 
the  letter  of  John  Brown  to  his  brother,  Moses,  already  quoted.  It 
was  not  an  institution  for  private  aggrandizement,  although  the  inter- 
ests of  "the  proprietors"  was  always  guarded— and  properly  so;  its 
stock  was  not  monopolized  by  a  few,  but  was  distributed  in  small  lots 
among  all  the  members  of  the  community.  Twenty  years  after  it  was 
founded  its  stockholders  exceeded  140  in  number.  The  largest  indi- 
vidual stockholder,  Thomas  L.  Halsey,  had  only  69  shares.  Nicholas 
Brown  and  Thomas  P.  Ives  held  65  shares  each.  Welcome  Arnold,  58 
shares,  and  besides  these  there  were  no  large  individual  holdings.  A 
very  great  number  held  from  one  to  five  shares,  and  the  list  contained 
the  names  of  "ten  charitable  societies  and  fifty-one  widows,  orphans 
and  fatherless  children".  At  practically  the  same  time  that  this 
condition  prevailed  in  the  Providence  Bank  other  banks  were  organ- 
ized with  $200,000  of  capital,  owned  by  only  four  stockholders  and 
represented  largely  by  speculative  promises  to  pay  in  the  form  of 
stock  notes.  Thus  from  the  point  of  view  of  the  investor  the  incor- 
porators of  the  Providence  Bank  were  to  a  predominant  degree  the 
trustees  of  the  interests  of  the  community.  But  their  trusteeship  had 
a  much  broader  scope  than  this— a  scope  arising  from  the  then  preva- 
lent notions  of  the  functions  of  banking. 

In  the  face  of  their  bitter  experience  the  leading  men  in  Rhode 
Island  had  not  entirely  escaped  from  the  "currency"  heresies  of  the 
period.  Even  so  acute  a  mind  as  Hamilton's  stumbled  on  this  point. 
The  preamble  of  the  bank  announced  one  of  the  objects  to  be  the  in- 
crease of  "the  medium  of  trade".  It  was  implicitly  believed  that  in 
every  community  there  is  a  demand  for  a  certain  amount  of  represent- 
ative money  medium,  which  will  pass  from  hand  to  hand  at  par  with 
coin,  and  will  not  be  presented  for  redemption  if  the  credit  of  the 
issuers  is  good.  Said  a  writer  in  the  Providence  Gazette  in  1784, 
"Nothing  is  necessary  to  make  this  representative  of  money  supply  the 
place  of  specie  but  the  credit  of  that  ofiice  or  company  who  delivers  it ; 
which  credit  consists  in  its  always  being  ready  to  turn  it  into  specie 
whenever  required".     "It   is  not   necessary   that   the   bank   should 


Chartered  Banking  in  Rhode  Island.  7 

always  have  a  fund  sufficient  to  discharge  all  its  notes  at  one  time,  it 
being  enough  if  it  is  capable  of  answering  any  demand  and  paying  all 
notes  as  soon  as  presented".  The  writer  calculated  that  notes  equal 
in  amount  to  twice  the  capital  might  safely  be  issued,  "though  this 
depends  much  upon  the  nature  of  the  business  the  notes  are  to  be 
employed  in".^  This  was  a  clear  statement  of  the  prevailing  thought. 
It  was  the  currency  principle  in  contrast  with  the  banking  principle. 
It  maintained  that  in  connection  with  the  demand  of  the  community 
for  representative  money,  a  certain  amount  of  paper  may  be  issued  by 
a  banking  corporation,  that  the  amount  is  not  limited  by  the  quick 
assets  of  the  bank  in  the  form  of  specie,  nor  even  by  its  contingent 
assets  in  the  form  of  capital ;  but  that  somehow  and  somewhere  in  the 
corporate  personalty  of  a  bank  is  an  intangible  something  called  credit, 
upon  which  a  currency  medium  may  safely  be  based.  When  a  few 
years  later  the  excessive  issues  of  paper  notes  by  the  banks  in  one  or 
two  instances  destroyed  their  convertibility,  the  legislators  sought 
the  remedy,  not  in  a  reduction  of  the  amount  of  notes  issued  nor  in  an 
increase  of  the  specie  reserve  of  the  banks,  but  in  an  increase  of  the 
intangible  credit  basis  of  the  notes  represented  by  increased  liability 
of  both  directors  and  other  stockholders.  Later  note  issues  were 
limited  to  a  certain  proportion  of  the  paid-up  capital,  but  no  laws  of 
the  state  ever  fixed  the  amount  of  the  bills  issuable  by  the  amount  of 
quick  assets  or  specie  on  hand.  Something  of  the  same  thought  had 
been  expressed  in  the  general  public  condemnation  of  those  who  had  at 
earlier  times  presented  bills  of  credit  to  their  issuers  for  redemption 
in  specie.  We  now  know  that  these  ideas  arose  partly  from  custom 
and  tradition  and  partly  from  a  real  scarcity  of  money  media,  but 
their  fundamental  fault  lay  in  mistaking  a  want  of  capital  for  a  want 
of  money  media.  What  they  needed  most  was  circulating  capital. 
They  thought  they  wanted  a  means  of  making  goods  circulate  more 
readily,  that  thus  consumer  and  producer  would  be  brought  closer 
together ;  that  trade  and  commerce  would  be  stimulated  and,  if  prices 
rose  somewhat,  such  a  rise  would  indicate  simply  a  normally  increased 
demand  for  both  products  and  labor— which  demand  had  not  before 
been  normal  because  of  the  absence  of  money  media.  They  did  not 
know  that,  aided  by  the  forces  of  nature,  capital  or  wealth  can  only 
increase  by  the  action  of  mind  and  muscle  upon  matter.  The  effective 
demand  for  goods  comes  from  a  supply  of  other  goods  and  cannot  be 
created  by  such  money  media  as  are  mere  counters  in  a  game  that  in 
its  last  analysis  is  simple  barter.  Plentifulness  of  money  media  was 
believed  to  be  equivalent  to  increased  activity  of  it,  and  to  a  greater 
ease  in  getting  it.  The  same  thought  has  constantly  reappeared  in  our 
monetary  history  from  that  day  to  this.     Their  idea,  therefore,  that 

'Gazette.  2-20,  1784. 


8  Chartered  Banking  in  Rhode  Island. 

there  is  a  demand  in  the  community  for  representative  money  media 
beyond  the  ability  of  existing  capital  to  supply,  when  aided  by  dis- 
count banking,  was  erroneous,  as  was  also  the  notion  that  such  a  neces- 
sary excess  of  money  media  could  be  supplied  by  an  intangible  and 
then  little  understood  factor  called  credit. 

But  if  there  was  a  fundamental  error  in  their  thinking  there  was 
also  a  fundamental  truth  in  it.  There  is  a  demand  for  a  representa- 
tive money  media  in  every  community,  but  it  can  be  adequately  sup- 
plied by  the  processes  of  discount  banking  and  by  the  conversion  of 
wealth  into  the  money  forms  of  capital.  The  difference  between  a 
circulating  medium  based  on  the  banking  principle,  and  a  circulating 
medium  based  on  the  currency  principle,  lies  not  simply  in  the  fact 
that  the  one  is  based  on  existing  capital,  while  the  other  is  based  on 
intangible  credit,  but  in  the  fact  that  the  circulation  of  the  former 
currency  is  constantly  ebbing  and  flowing  and  may  at  times  be  all 
redeemed  and  entirely  disappear,  while  the  latter  is  a  permanently 
circulating  fund,  which  is  not  expected  to  be  redeemed. 

The  Providence  Bank  then,  in  1791,  was  to  supply  a  circulating 
medium  to  a  community  believing  in  the  currency  principle.  Some 
of  the  circulation  was  to  be  convertible  and  was  to  be  converted 
from  time  to  time.  Some  of  it  was  to  be  convertible  but  was  not  to 
be  converted.  The  determination  of  the  amount  that  would  not  be 
redeemed  was  the  unknown  factor  in  the  problem,  and  it  was  the  dan- 
gerous factor.  If  the  promotors  of  the  bank  were  to  furnish  a  medium 
that  would  always  be  maintained  at  par  with  coin,  such  factors  must 
be  eliminated  as  far  as  possible.  If  the  bank  was  to  act  as  trustee  for 
the  interests  of  the  community  in  furnishing  it  a  medium  as  good  as 
real  money,  it  was  not  too  much  to  ask  that  the  community  itself 
should  stand  sponsor  for  the  integrity  of  its  individual  members.  The 
quick  assets  of  the  bank  would  not  suffice  to  redeem  all  of  the  issues  at 
one  time.  The  contingent  assets  must  be  brought  as  near  as  possible 
to  the  condition  of  quick  assets.  The  bank  process,  by  avoiding  legal 
delay  on  an  acknowledged  debt,  converted  all  overdue  paper  into  a 
quick  asset,  and  the  principle  of  a  thirty  day  discount  eliminated  the 
delays  incident  to  realizing  on  long  time  or  accommodation  paper. 
The  public  demanded  that  the  bank  notes  should  be  redeemable  in  cash 
on  demand,  the  bank  in  return  asked  that  the  public  pay  cash  on 
demand  to  it  on  its  matured  notes.  Strict  punctuality  on  part  of  the 
one  could  only  be  maintained  by  strict  punctuality  on  part  of  the 
other.  The  "bank  process"  enabled  the  bank  to  enforce  that  punc- 
tuality upon  others  which  others  demanded  of  it. 

It  was  therefore  a  device  to  insure  the  convertibility  of  the  large 
issues  which  the  community  demanded.  It  stamps  the  originators  of 
it  and  the  founders  of  the  Providence  Bank  as  men  capable  of  adapt- 


Chartered  Banking  in  Rhode  Isi.and.  9 

ing  their  institution  to  its  peculiar  environment.  It  marks  them  as 
resourceful  and  as  remarkable  in  banking  management  as  they  seem 
to  have  been  in  their  other  enterprises.  They  discovered  that  any 
system  of  credit  is  absolutely  impossible  without  the  efficient  co-opera- 
tion of  a  sovereign  government.  The  bank  process  provided  for  this 
co-operation.  It  was  a  new  device  in  the  then  state  of  finance  and  it 
was  effectual. 

They  did  not  overlook  other  means  toward  the  same  end.  The  pay- 
ment of  three-fifths  of  the  value  of  the  stock  in  United  States  bonds, 
and  the  r^^tention  of  the  bonds  for  many  years  in  the  vaults,  were  also 
a  part  of  a  plan  to  maintain  a  reserve  in  a  form  that  had  both  earning 
power  and  convertibility.  In  1800  when,  owing  to  political  or  other 
causes,  an  unusual  demand  was  made  on  the  specie  reserve,  John 
Brown,  then  a  member  of  congress,  sent  a  draft  on  the  United  States 
Treasury  for  $13,699  in  coin  to  the  bank.  He  ordered  $10,000  of  the 
United  States  bonds  to  be  sold  and  $20,000  of  specie  loans  to  be 
called  in.^ 

It  has  been  assumed  that  the  bank  process  was  unnecessary,  but  it  is 
the  part  of  wisdom  to  forefend  necessity  by  providing  for  it,  and  it  is 
not  improbable  that  the  lack  of  apparent  necessity  for  the  exercise  of 
the  process  at  first  was  caused  by  the  fact  of  its  existence.  It  has  also 
been  claimed  that  it  was  unjust.  But  conditions  were  peculiar.  The 
debtor  classes  had  been  taught  by  eighty  years  of  paper  money  issues 
that  an  evasion  of  debts  was  to  be  made  easy ;  that  scaling  them  was 
the  natural  order  of  things.  Within  two  years  the  state  legislature 
itself  had  repudiated  fourteen-fifteenths  of  all  its  obligations  by  re- 
deeming them  at  a  rate  of  15  to  1.  The  sense  of  honor  and  of  moral 
obligation  of  the  community  had  been  dulled,  not  only  by  the  direct 
acts  of  the  assembly,  but  by  repeated  laws  for  easing  debtors  and  a 
general  system  of  judicial  procedure  that  approached  closely  to  a 
travesty  on  justice  and  seriously  threatened  the  inviolability  of  con- 
tract. Many  had  become  accustomed  to  do  as  they  pleased  in  financial 
matters  and  lawful  restraint  to  them  was  synonymous  with  despotism. 
Those  versed  in  the  political  and  social  history  of  Rhode  Island  and 
the  attitude  of  the  people  toward  the  federal  constitution  will  easily 
understand  that  the  state  was  a  hotbed  of  such  as  not  only  opposed  a 
centralized  government,  but  suffering  from  debt,  poverty  and  genera- 
tions of  laxity  in  business  matters,  opposed  it  because  it  stood  for  that 
very  punctuality  of  payment  and  inviolability  of  written  agreement 
which  was  foreign  to  their  loose  ideas  of  freedom.  Some  of  them  had 
forgotten  that  Rhode  Island  commerce  had  been  threatened  with  ruin 
by  a  continuation  of  depreciated  paper  issues  in  1751  and  that  only 
when,  at  about  the  close  of  the  Seven  Years '  War,  all  money  was  kept 

'Moses  Brown  Papers,  Dec.  15,  1800. 


10  Chartered  Banking  in  Rhode  Island, 

at  par  with  silver  and  money  contracts  had  a  tangible  value,  the 
state  regained  some  of  its  former  trade  and  entered  upon  the  few 
years  of  its  greatest  business  prosperity  during  the  colonial  era.  The 
great  majority  of  the  people  knew  no  way  of  paying  one  obligation 
but  by  creating  another.  They  had  used  the  state  issue  of  paper 
money  in  1786  for  that  purpose,  and  they  were  ready  to  toss  up  their 
caps  in  praise  of  an  incorporated  private  bank  that  would  aid  them  in 
the  same  way.  They  did  not  know  that  in  any  community  based  on 
the  principle  of  private  property  the  getting  out  of  debt  is  just  as 
necessary  as  getting  into  it.  The  Browns  and  their  associates  did. 
The  bank  process  was  devised  to  meet  this  state  of  habitual  negligence 
in  mercantile  matters.  It  simply  compelled  such  men  to  be  punctually 
honest.     Naturally  they  did  not  like  it. 

In  some  instances  it  may  have  worked  hardship,  but  the  misfortune 
of  a  single  individual  was  by  no  means  comparable  to  the  hardships 
which  might  have  been  entailed  upon  the  whole  community  by  an 
irredeemable  currency.  It  is  seldom  an  injustice  to  require  a  man  to 
keep  his  agreement.  The  injustice  at  that  time  lay  not  in  the  bank 
process  as  in  the  prevalent  notion  that  the  bank  as  a  creator  of  money 
was  a  creator  of  wealth  in  which  all  wanted  to  participate.  Few  men 
knew  how  to  use  capital;  fewer  how  to  use  credit.  The  system  of 
issues  of  currency  a  few  years  later  made  the  obtaining  of  credit  easy. 
It  was  to  blame  for  fostering  imprudence,  not  the  bank  process  for 
insisting  that  imprudence  should  reap  its  just  punishment.  There 
is  no  evidence  that  the  bank  process  was  abused  or  that  numerous 
cases  of  hardship  resulted  from  it.  On  the  contrary,  the  banks  fre- 
quently carried  accommodation  loans  by  renewal  for  many  years, 
rather  than  distress  a  borrower. 

The  law  also  had  its  political  relations.  The  peculiar  individualism 
of  the  state  which  limited  legislative  action  to  a  narrow  field  was  illus- 
trated in  all  the  bank  charters.  The  result  was  a  remarkable  absence 
of  any  degree  of  state  control  or  supervision.  The  state  as  such  never 
subscribed  for  bank  stocks  (it  bought  some  bank  stocks  for  the  perma- 
nent school  fund),  as  was  the  case  with  other  New  England  states.  No 
reports  were  required  of  the  banks  for  many  years.  No  limitations 
were  placed  upon  their  issues  of  notes  and  no  bank  charter  was  ever 
granted  for  a  specific  term  of  years.  All  were  unlimited  as  to  time.^ 
In  every  respect  the  corporations  were  subject  only  to  individual  direc- 
tion and  management.  This  absence  of  restrictions  was  normal  to 
the  inherited  customs  of  the  people,  but  it  placed  a  very  great  degree 
of  responsibility  upon  the  directors  of  the  first  few  banks.  They 
could  not  shield  themselves  by  a  technical  conformity  to  restrictive 

'Only  one  charter  was  amended  so  as  to  give  it  a  limited  life  of  thirty 
years,  that  of  the  Bristol  Commercial  Bank,  June,  1811.  The  amendment  was 
soon  repealed. 


Chartered  Banking  in  Rhode  Island.  11 

law.  The  bank  process,  however,  enabled  them  to  shift  some  of  their 
responsibility  to  the  community,  to  which  they  were  furnishing  both 
a  cheap  money  medium  and  liberal  loans. 

Such  was  the  bank  process  in  its  origin.  The  false  notions  of  cur- 
rency, the  demands  of  the  community  that  the  bank  should  issue  it  in 
liberal  quantities,  the  trusteeship  for  the  community's  interest  in 
maintaining  it  at  par— all  were  parts  of  a  system  in  which  the  bank 
process  had  a  proper  and  necessary  place.  About  1810,  when  banks 
ceased  to  be  trustees  for  the  business  interests  of  the  community,  when 
circulation  was  no  longer  issued  to  meet  the  needs  of  the  community, 
but  for  the  sole  purpose  of  speculation  and  gain  of  a  few  stockholders 
—then  the  bank  process  became  an  anomaly,  but  some  years  passed 
before,  in  1818,  owing  to  these  facts  and  to  the  business  distress  then 
prevalent,  it  was  modified. 

The  Providence  Bank  acted  also  as  a  bank  of  deposit,  but  rather  as 
a  safe  deposit  vault  than  according  to  the  modern  deposit  system. 
Discounting  seems  largely  to  have  been  done  by  means  of  cash  pay- 
ments of  bills  and  coin,  or  by  a  check  on  some  other  distant  bank, 
rather  than  by  a  credit  of  the  proceeds  to  the  account  of  the  borrower. 

With  these  functions  and  powers  the  Providence  Bank  opened  its 
doors  for  business  October  10,  1791.  "on  the  south  side  of  the  new 
paved  street  commonly  known  by  the  name  of  Governor  Hopkins's 
lane".  In  two  small  rooms  on  the  main  floor  of  the  building  still 
standing,  this  noteworthy  institution  transacted  its  affairs  more  than 
ten  years.  From  the  ceiling  of  the  back  room  project  two  huge  eye 
bolts,  to  which  were  attached  the  pulleys  for  raising  from  and  lower- 
ing into  the  cellar  underneath,  the  chests  of  silver  and  gold.  The 
only  entrance  to  the  cellar-vault  was  closed  at  the  end  of  the  business 
day  by  a  trap-door,  and  there  is  a  tradition  that  in  a  chair  placed  upon 
it  the  bank  watchman  sat  from  sunset  until  bank  hours  in  the  morning. 

Four  years  after  the  Providence  Bank  was  organized  the  Bank  of 
Rhode  Island  was  chartered  with  $100,000  capital  and  authority  to 
increase  it  to  $500,000.  In  1800  the  Washington  Bank  of  Westerly, 
and  the  Bristol  Bank  of  Bristol,  were  chartered  with  $50,000  and 
$80,000  capital  respectively,  and  authorized  capital  of  $150,000  and 
$300,000,  and  by  1809  the  legislature  had  chartered  fourteen  banks 
with  capital  of  $1,535,000  and  authority  to  increase  to  $5,000,000. 
The  state  population  was  at  that  time  75,000  and  the  actual  banking 
capital  exceeded  $20  per  capita. 

Banking  facilities  so  ample  were  of  course  not  wholly  an  outgrowth 
of  the  commercial  and  agricultural  business  needs.  Here,  even  more 
than  elsewhere,  the  political  and  sectional  influences  early  played  an 
important  part  in  the  establishment  of  banks.  Scarcely  had  the 
Providence  and  Newport  banks  been  started  when  the  agricultural 


THE. FIRST  OFFICE  OF  THE  PROVIDENCE  BANK. 

In  Two  Rooms  on  the  Second  Floor  of  this  House  the  Providence 
Bank  was  Established  in  1791.  The  Street  Upon  Which  it  Stands 
Was  for  Many  Years  Subsequently  Called  "Bank  Lane."  The 
Original  Name  of  Hopkins  Street  Was  Restored  After  the  Bank 
Was  Moved  to  South  Main  Street. 


Chartered  Banking  in  Rhode  Island.  13 

interests  began  to  demand  banking  favors  of  the  general  assembly. 
Said  the  incorporators  of  the  Washington  Bank,  in  June,  1800,  "con- 
sidering that  those  banks,  which  are  at  present  established  in  this  state, 
are  too  remote  or  too  confined  in  their  operations  to  diffuse  their  bene- 
fits so  generally  to  the  country  as  could  be  wished ;  considering  the 
embarrassments  into  which  a  farmer  is  frequently  drove  for  the  want 
of  means  of  stocking  his  farm  at  those  seasons  of  the  year  when  money 
is  obtained  with  the  greatest  difficulty;  considering  that  in  a  place 
particularly  fitted  by  nature  to  encourage  the  industry  and  ingenuity 
of  the  mechanic  by  holding  out  the  sure  prospect  of  a  suitable  return, 
for  his  enterprise,  nothing  is  wanting  but  those  little  assistances  from 
time  to  time  which  banks  only  can  give" — now  therefore,  etc.  Two- 
thirds  of  the  directors  of  the  bank  and  the  president  were  required  to 
be  residents  of  Washington  county. 

The  preamble  of  the  Rhode  Island  Union  Bank  of  1804  assumed 
that  "a,  bank  in  which  the  agricultural  and  mercantile  interests  should 
be  united  would  be  productive  of  the  most  beneficial  advantages  to  a 
state  like  ours,  where  those  interests  are  so  blended  and  dependent  on 
each  other.  In  the  establishment  of  banks  heretofore  the  interests  of 
the  farmer  have  not  been  sufficiently  consulted  and  the  pledge  of  his 
real  estate,  the  best  security  in  his  power  to  give,  is  not  accepted". 
The  charter  prohibited  the  bank  from  owning  ships  or  vessels  or  being 
directly  or  indirectly  concerned  in  trading  and  selling  goods,  except 
such  as  came  to  it  by  way  of  pledge. 

Rhode  Island  bank  charters  did  not,  as  those  of  some  other  states, 
set  aside  a  specific  portion  of  the  capital  to  be  loaned  on  land  security, 
but  the  assumed  antagonism  of  interest  voiced  in  the  preambles  just 
quoted  was  repeated  in  ever  broadening  circles  throughout  the  country 
for  many  years.  The  balance  of  trade  so  to  speak,  between  the  farm- 
ing and  commercial  sections  was  more  adverse  to  the  former  in  this 
state  than  in  many  others,  because  of  the  poverty  of  the  soil.  The 
disadvantageous  situation  of  the  farming  population,  here  illustrated 
in  miniature,  had  its  complete  analogue  a  few  years  later  in  the  relation 
between  New  England  as  the  center  of  manufacturing  and  the  middle 
west  as  the  center  of  agriculture.  As  the  farming  section  of  Rhode 
Island  complained  of  the  towns,  as  commercial  centers  to  which  money 
media  gravitated,  so  later  the  middle  states  and  the  west  complained 
of  New  England  as  the  point  to  which  specie  was  always  flowing.  As 
population  spread  westward  other  states  in  turn  tried  the  same  bank- 
ing experiments  which  had  earlier  failed  in  the  eastern  states ;  those 
experiments  were  always,  under  different  forms,  attempts  to  adopt  a 
banking  system  to  the  farmers'  needs.  The  attempt  to  issue  circula- 
tion in  liberal  quantities  on  the  mere  credit  of  the  issuer,  and  redeem- 
able on  demand  in  coin,  and  at  the  same  time  to  make  loans  on  farming 


14  Chartered  Banking  in  Rhode  Island. 

lands  renewable  for  many  years,  was  to  attempt  the  impossible.  The 
farmer  needed  loans  for  a  series  of  years,  and  such  loans  being  practi- 
cally permanent  investments,  were  entirely  incompatible  with  the  issue 
of  money  media  convertible  on  demand.  The  absence  of  any  effort  on 
part  of  the  early  banks  to  accumulate  a  surplus  aggravated  the  inher- 
ent difficulties  of  management.  It  is  not  surprising,  therefore,  that 
the  Washington  Bank  was  compelled  at  times  to  suspend  dividends 
and  replenish  its  "impaired  capital." 

The  commercial  banks,  however,  here  had  little  superiority  over  the 
agricultural  banks  with  regard  to  the  length  of  time  which  their  paper 
might  run.  Despite  the  thirty  day  clause  in  the  rules  of  the  Provi- 
dence Bank,  it  could  not  but  happen  that  a  very  large  portion  of  its 
discounts  and  those  of  the  other  banks  would  be  renewed  again  and 
again.  There  were  long  periods  intervening  between  the  beginning 
and  the  end  of  the  voyages  of  the  vessels  belonging  in  Rhode  Island— 
and  its  trade  was  almost  wholly  on  the  seas.  Thus  the  discounts  of  the 
merchants  approached  very  closely  to  long-time  accommodation  paper. 
The  complaints  of  the  farmers  at  this  discrimination  against  them 
were,  therefore,  probably  well  founded. 

Banks  formed  for  the  benefit  of  the  agricultural  interests,  if  man- 
aged properly,  might  have  accomplished  some  of  the  ends  for  which 
they  were  organized.  According  to  their  preambles,  at  least,  their 
object  was  the  best  interests  of  the  community.  Many  banks,  how- 
ever, were  chartered  without  preambles,  and  the  reason  for  their 
existence  was  neither  the  benefit  of  the  state  nor  that  of  the  commu- 
nity. Some  of  them  were  purely  personal  institutions,  organized  part- 
ly, at  least,  as  adjuncts  to  other  lines  of  business  or  for  political 
reasons. 

The  business  most  closely  associated  with  early  banking  was  that  of 
insurance.  For  many  years  at  first  it  was  largely  concerned  with 
marine  risks,  and  as  the  towns  of  Providence,  Newport,  Warren  and 
Bristol  were  all  engaged  in  the  shipping  industry,  and  the  voyages 
were  in  many  cases  two  years  in  length  and  involved  valuable  cargoes, 
the  business  was  very  profitable,  .though  hazardous.  Partly  from  its 
hazardous  character  it  was  necessary  that  the  insurance  com- 
panies should  have  large  capitals.  Such  capital,  however,  was 
merely  nominal  in  most  cases,  and  like  that  of  many  of  the 
banks  organized  soon  afterward,  was  represented  by  stock  notes 
payable  in  installments  at  various  intervals.  The  insurance 
companies  seem  to  have  had  no  offices  and  the  banks  acted 
as  their  fiscal  agents.  In  case  losses  necessitated,  the  stock 
notes  were  discounted  by  the  banks,  and  a  bank  became  a  very  neces- 
sary adjunct  to  the  insurance  companies,  which  had  no  quick  assets, 
but  were  liable  to  be  called  upon  for  a  large  amount  of  money  at  any 
time. 


Chartered  Banking  in  Rhode  Island.  15 

The  business  relation  between  the  banks  and  insurance  companies 
was  close  in  other  respects  also.  The  marine  risks  which  the  insurance 
companies  carried  were  large  and,  as  is  the  custom  to-day,  the  pre- 
miums were  not  usually  paid  by  cash,  but  by  notes.  These  notes  were 
discounted  at  the  banks  also,  and  seem  to  have  been  considered  a  very 
valuable  line  of  paper.  They  were  long  time  notes,  but  not  as  long  as 
the  time  of  the  voyage,  and  in  order  to  insure  the  collection,  as  well 
as  the  stock  notes  of  the  stockholders,  the  power  of  the  bank  process 
was  granted  directly  to  some  of  the  insurance  companies.^  In  other 
cases,  it  was  provided  that  where  the  bank  acted  merely  as  a  collector 
for  an  insurance  company,  it  could  enforce  the  powers  of  the  bank 
process  with  regard  to  such  paper.^  To  such  uses  was  the  bank  pro- 
cess thus  early  diverted. 

In  some  cases  the  profits  of  the  insurance  companies  began  to  reach 
considerable  sums,  and  the  money  was  invested  largely  in  bank  stocks. 
In  some  cases  the  insurance  companies  as  corporations  seem  to  have 
given  their  corporate  notes  for  stock  in  banks  just  as  individuals  did. 
Thus  the  relation  between  them,  which  usually  first  arose  because  the 
same  men  were  interested  in  both  kinds  of  corporations,  became  an 
interest  of  mutual  corporate  ownership  and  of  profit. 

Thus  we  find  the  Providence  Insurance  Company,  chartered  in 
1799,^  bought  stock  in  the  Providence  Bank.  In  1814  it  owned  150 
shares  and  was  the  largest  single  stockholder  of  the  bank.*  The  New- 
port Bank  of  Newport  was  incorporated  in  1803.  By  the  terms  of  its 
charter  its  president  and  directors  were  authorized  to  organize  the 
Rhode  Island  Insurance  Company,  and  the  latter  was  to  subscribe  for 
one  thousand  shares  of  the  bank 's  stock.  As  the  par  value  of  the  bank 
stock  was  $60,  and  the  amount  of  it  was  $120,000,  this  subscription 
amounted  to  one-half  of  the  total  issue  of  bank  stock.  The  Washing- 
ton Insurance  Company  of  Providence  Avas  chartered  in  1800.  It 
seems  to  have  been  a  competitive  institution  to  the  Providence  Insur- 
ance Company  and  to  have  been  managed  by  a  coterie  not  altogether 
friendly  to  the  Browns.  Thus  far  the  Providence  Bank  had  had  the 
local  field  alone.  Now,  in  connection  with  the  Washington  Insurance 
Company,  a  project  for  a  new  bank,  the  Exchange,  was  brought  for- 
ward. Brown  offered  to  let  the  Washington  Insurance  Company  into 
the  Providence  Bank  on  the  same  terms  that  the  Providence  Insurance 
Company  had  subscribed,  and  its  promoters  were  offered  the  privileges 

^Warren  Insurance  Company.     Acts  and  Resolves,  Feb.,  1802. 

^Charter  of  Newport  Bank,  Oct.,  1803. 

^The  charter  of  the  North  American  Insurance  Company  of  Philadelphia 
in  1798  was  the  first  charter  in  the  United  States. 

*It  is  interesting  to  note  in  connection  with  the  Providence  Insurance 
Company,  of  which  the  Browns  were  the  leading  spirits,  that  soon  after  its 
organization  it  was  voted  to  take  no  risks  on  vessels  directly  or  indirectly 
engaged  in  the  slave  trade. 


16  Chartered  Banking  in  Rhode  Island. 

of  the  existing  bank.  These  offers  were  refused,  and  the  opposition  to 
the  new  bank  was  then  vigorously  maintained  in  public  by  the  friends 
of  the  old  bank.  Brown  wrote  to  his  brother  that  he  feared  the  evil 
results  of  such  a  multiplex  grant  of  bank  charters.  He  thought ' '  that 
all  the  neighboring  states  will  at  once  put  a  prohibition,  by  general 
consent  or  otherwise,  against  any  and  all  bank  paper  of  our  state". 
A  reduction  of  circulation  would  follow,  and  small  dividends  would 
result.  "Thus",  said  he,  ''reduced  to  small  business,  there  may  be 
found  among  some  of  the  managers  such  frauds  and  inaccuracies  as 
to  stamp  a  curse  on  the  whole  banks  of  the  state ' '.  His  brother,  Moses, 
wrote  an  argument  to  show  that  one  bank  could  safely  circulate  "as 
much  or  more  bank  paper"  than  two.  This  argument  John  approved, 
but  with  regard  to  the  personal  feeling,  which  seems  to  have  been 
engendered  by  the  incident,  he  said,  "though  we  ought  to  be  careful 
to  give  no  just  offence  in  threatening  to  call  in  all  our  moneys  due 
from  the  gentlemen  who  promote  the  new  bank,  it  will  of  course  take 
place ' '.  He  had  made  an  agreement  with  Judge  Bourn,  the  promoter 
of  the  Bristol  Bank  the  year  before,  that  it  should  join  forces  with  the 
Providence  and  the  other  existing  banks  against  any  new  bank  corpo- 
rations. The  arrangement  did  not  avail,  however,  and  the  opposition 
failed  to  hinder  the  issue  of  a  charter  to  the  Exchange  Bank  in  Feb- 
ruary, 1801.  Perhaps  as  the  Browns  and  their  friends  Avere  feder- 
alists, the  republican  tone  of  the  state  government  at  the  time  was  not 
favorable  to  them. 

The  charter  of  the  Exchange  Bank  provided  for  4,000  shares  par 
value  of  $50  each,  and  the  Washington  Insurance  Company  was  au- 
thorized to  subscribe  for  1,100  shares.  The  Bristol  Insurance  Com- 
pany was  organized  in  February,  1800 ;  the  Bristol  Bank,  in  June  of 
the  same  year.  There  was  a  Warren  Insurance  Company  and  a  War- 
ren Bank.  Within  the  period  1799-1807  ten  insurance  companies  were 
organized  in  the  four  seaport  towns  of  the  state  and  nine  of  them 
engaged  in  active  business.  In  the  same  towns  there  were  nine  banks 
and  the  insurance  companies,  so  far  as  observed,  owned  stock  in  most 
of  them.  A  similar  relation  between  the  Merchants  Insurance  Com- 
pany and  the  Bank  of  Commerce,  both  of  Providence,  illustrated  these 
facts  as  late  as  1851.  It  is  significant  that  the  first  restrictive  law  as 
to  corporations,  passed  in  1809,  was  called  a  law  regarding  the  "pro- 
cess against  banks  and  insurance  companies." 

In  the  organization  of  the  Roger  Williams  Bank,  chartered  in  1803, 
politics  seemed  to  have  had  some  part.  Previous  to  that  time  the 
United  States  deposits  had  been  carried  in  the  Providence  Bank.  In 
1803  Jefferson  wrote  to  Secretary  Gallatin,  "as  to  the  patronage  of  the 
republican  bank  in  Providence,  I  am  decidedly  in  favor  of  making  all 
the  banks  republican  by  sharing  deposits  amongst  them  in  proportion 


Chartered  Banking  in  Rhode  Island.  17 

to  the  dispositions  they  show".^  The  Roger  Williams  Bank  soon 
began  to  get  the  public  deposits  and  continued  to  hold  them  until  the 
second  United  States  Bank  established  a  branch  in  Providence  in  1817. 
The  Bristol  Bank  carried  the  government  deposits  in  Bristol ;  the 
Newport  Bank  in  Newport.  These  three  were  the  only  banks  in  Rhode 
Island  which  purchased  United  States  bonds  during  the  war  of  1812. 
Their  political  affiliations  were  thus  apparent. 

The  charters  granted  to  the  banks  beginning  in  1800  contain  slight 
but  important  modifications  when  compared  with  the  charter  of  the 
Providence  Bank,  such  modifications  applying  chiefly  to  the  terms  of 
payment  for  the  stock.  Not  infrequently  in  the  case  of  country  banks 
the  requirement  that  the  stock  be  partly  or  in  whole  paid  for  in  specie 
was  omitted.  The  number  of  installments  upon  which  payment  might 
be  deferred  by  the  directors  was  increased ;  in  some  cases  three  out  of 
seven  were  thus  deferred.  The  payments  for  the  stock  of  the  Exchange 
Bank  of  Providence  extended  from  February,  1801,  to  October,  1802, 
but  by  an  amendment,  adopted  in  October,  1801,  the  directors  were 
permitted  to  extend  the  payment  of  any  or  all  subsequent  installments. 
The  installments  of  the  Farmer's  Exchange  Bank  of  Glocester  were 
seven  in  number.  A  cash  deposit  of  $1  per  share  was  required  with 
the  subscription,  and  the  remaining  payments  were  extended  over 
three  years  from  February,  1804,  to  March,  1807. 

Other  modifications  in  the  charters  afi:ected  the  powers  of  stock- 
holders and  directors.  No  shareholder  in  the  Newport  Bank  (char- 
tered 1803)  could  transfer  his  stock  while  indebted  to  the  bank,  and 
if  a  stockholder's  obligation  was  not  paid  at  maturity,  the  directors 
were  authorized  to  summarily  dispose  of  enough  of  his  stock  to  cover 
the  bank's  claim.  Not  long  afterward  it  became  customary  to  insert 
a  clause  in  all  charters  pledging  stockholder's  stock  for  their  debts  to 
the  bank.  The  Rhode  Island  Union  (chartered  in  1804)  was  the  first 
bank  in  which  the  voting  power  of  the  stockholders  was  equivalent  to 
the  number  of  shares  held,  and  though  in  most  previous  charters  it 
had  been  provided  that  stockholders'  meetings  could  be  held  only 
annually,  unless  called  at  other  times  by  the  directors,  in  the  Rhode 
Island  Union  such  meetings  must  be  called  on  the  request  of  the 
holders  of  300  shares.  In  the  Narragansett  Bank  of  Wickford,  char- 
tered 1805,  holders  of  200  shares  had  the  power  to  order  a  stockhold- 
ers' meeting.  The  Smithfield  Union  Bank  charter,  1805,  provided 
that  directors  must  own  at  least  five  shares,  while  in  the  Rhode  Island 
Central  Bank  of  East  Greenwich,  directors  were  required  to  hold 
twenty  shares.  The  directors  of  the  Bristol  Commercial  Bank  (char- 
tered 1809),  and  others  chartered  at  about  the  same  time,  could  not 
hold  directorships  in  other  banks. 

'Gallatin's  Works  i,  129,  July  12,  1803. 


18  Chartered  Banking  in  Rhode  Island. 

These  restrictive  provisions  in  the  charters  tell  the  story  of  practices 
then  beginning  to  be  prevalent.  It  did  not  follow,  however,  that  be- 
cause charters  contained  certain  clauses,  those  clauses  were  generally 
obeyed.  In  banking,  as  in  other  lines  of  business,  in  the  absence  of 
rigid  state  supervision  honesty  of  management  and  success  as  well 
depend  wholly  upon  the  character  of  the  managers.  The  most  unique 
illustration  of  the  limits  to  which  bank  frauds  could  be  carried  was 
that  of  the  Farmer's  Exchange  Bank  of  Glocester. 

The  origin  of  these  frauds  was  not  wholly  local.  The  profits  of 
banking  during  the  first  few  years  of  the  century  caused  the  issue  of 
a  large  crop  of  charters,  especially  in  Massachusetts,  Maine  and  New 
Hampshire,  between  1800  and  1810.  The  notes  of  these  banks  flowed 
into  Boston  as  to  a  clearing  house.  They  quickly  fell  below  par  and 
displaced  the  issues  of  the  Boston  banks  in  all  local  transactions  be- 
tween individuals.  Money  brokers  began  to  deal  in  them,  charging 
one-fourth  per  cent,  for  exchanges.  In  1804  the  Boston  Exchange 
Office  was  incorporated  and  devoted  its  attention  to  the  business  of 
exchanging  money.  About  the  same  time  the  brokers  began  to  send 
the  excessive  issues  of  the  country  banks  home  to  be  redeemed.  The 
less  accessible  the  home  bank,  the  more  costly  was  the  process  of  re- 
demption to  the  brokers.  Hence  speculators  began  to  charter  banks 
in  the  most  remote  and  out-of-the-way  places  of  Maine  and  New  Hamp- 
shire. The  chief  of  these  swindlers  was  Andrew  Dexter,  Jr.  He 
bought  up  the  stock  of  the  Boston  Exchange  Office  and  of  several 
cross-road  banks.  Among  them  was  the  Farmer's  Exchange  Bank  of 
Rhode  Island.  This  was  in  1808.  In  March,  1809,  ''the  funeral  of 
the  Farmer's  Exchange  Bank"  was  **on  its  way  to  the  general  assem- 
bly in  East  Greenwich".^ 

A  committee  of  investigation  had  been  appointed  in  February 
and  a  report  was  rendered  at  the  March  session  of  the  assembly.  The 
legislative  halls  were  crowded  with  spectators  who  listened  to  a  story 
that  surpassed  their  strangest  dreams.  The  committee  stated  thf,t 
from  the  day  of  the  issue  of  the  charter  the  directors  as  a  whole  had  no 
proper  knowledge  of  the  affairs  of  the  bank.  Some  of  the  stockholders 
had  no  notice  of  the  suspension  of  payment  of  the  last  installment  for 
their  stock,  and  thus  paid  for  their  holdings  in  full  in  cash.  The 
directors  paid  no  money  whatever.  They  paid  their  first  installment 
in  specie,  but  soon  afterAvard  took  an  equal  amount  of  notes,  for  which 
they  gave  no  receipt.  For  part  of  the  first  five  installments  they  gave 
personal  notes  without  indorsers,  and  for  the  last  two  installments 
they  gave  nothing.  They  held  103  shares  each.  Instead  of  a  sub- 
scription for  2,000  shares,  as  required  by  the  charter,  the  bank  started 
with  only  661  shares  subscribed.     The  paid-in  capital  at  the  outset  was 

'R.  I.  Americjan,  March,  1809. 


Chartered  Banking  in  Rhode  Island.  19 

$11,806.61.  The  installment  which  the  directors  withdrew  left  the 
bank  with  an  actual  cash  capital  of  $3,081.11.  lii  1805  the  directors 
voted  themselves  $200  each  in  bills.  They  took  other  bills  of  the  bank 
into  the  neighboring  states  and  bought  corn  and  other  products  with 
them,  making  no  return  whatever  to  the  bank.  In  February,  1808, 
they  voted  to  divide  the  whole  assets  of  the  bank  among  themselves, 
but  they  did  not  carry  out  the  plan.  In  the  following  month,  how- 
ever, they  bought  of  sundry  stockholders  450  shares  and  paid  for  them 
with  the  assets  of  the  bank,  largely  by  means  of  notes  of  the  stock- 
holders themselves,  which  had  been  given  to  the  bank  for  money  bor- 
rowed and  were  at  this  time  returned  to  them.  The  institution  was 
then  ripe  for  Mr.  Dexter.  During  the  year  the  directors  sold  out  to 
him  or  to  his  agents  and  themselves  received  pay  from  the  remaining 
assets  of  the  bank.  The  amount  of  their  purchase  money  was  $1,300 
each.  Dexter  paid  for  the  whole  bank  $3,784.95.  The  directors  had 
already  by  vote  turned  over  to  him  the  plates  on  which  the  bills  of  the 
bank  were  printed.  He  had  bills  printed  and  sent  to  the  cashier,  who 
was  ordered  to  sign  them  at  night  and  return  them  secretly  and  as 
rapidly  as  possible.  The  cashier  obeyed  this  order.  Dexter  had  at 
the  same  time  a  bank  in  Berkshire.  The  bills  of  the  Farmer's  Ex- 
change Bank  were  paid  out  over  the  counters  of  the  Berkshire  bank, 
and  those  of  the  Berkshire  Bank  over  the  counters  of  the  Farmer's 
Exchange  Bank.  As  the  bills  of  both  banks  were  redeemable  in  specie, 
both  banks  were  thus  ' '  specie  paying ' '.  Dexter  had  banks  all  over  the 
country,  and  among  the  bills  paid  out  by  the  Farmer's  Exchange  Bank 
were  some  of  the  Marietta  Bank  of  Ohio.  He  borrowed  from  the  bank 
at  various  times,  in  some  instances  giving  notes  payable  in  eight  years 
and  in  others  giving  notes  of  which  the  following  is  a  copy :  ' '  I,  An- 
drew Dexter,  Jr.,  do  promise  the  president,  directors  and  company  of 

the  Farmer's  Exchange  Bank  to  pay  them dollars,  two  years 

from  date  with  interest  at  2  per  cent,  per  annum,  it  being,  however, 
understood  that  said  Dexter  shall  not  be  called  upon  to  make  pay- 
ment until  he  thinks  proper,  he  being  the  principal  stockholder  and 
best  knowing  when  it  will  be  proper  to  pay  the  same".  Dexter  bor- 
rowed in  all  $845,771.  The  bank,  largely  through  him,  had  issued 
$644,843  of  currency,  of  which  about  $580,000  were  still  outstanding 
when  the  committee  made  its  report.  The  total  assets  of  the  bank 
consisted  of  $86.48  in  specie.  The  general  assembly  had  attended  the 
funeral,  but  there  was  not  even  a  corpse  left  to  bury.  ' '  Such  a  scene 
of  dishonesty,  dissimulation,  turpitude  and  everything  that  is  iniqui- 
tous", said  the  American,  "was  never,  we  believe,  before  exhibited  to 
an  astonished  public".^  A  letter  to  Mathew  Carey  from  Boston  said, 
"  It  is  impossible  for  us  to  picture  the  ruin  and  distress  that  followed, 

'March  24,  1809. 


20  Chartered  Banking  in  Etfode  Island. 

the  effects  of  which  are  still  remaining.  It  is  said,  and  we  presume 
correctly,  that  in  one  county  of  this  state  there  were  $100,000  of  the 
bills  of  the  Farmer's  Exchange  Bank  in  circulation  at  the  time  it 
failed,  and  probably  in  the  state  (Mass.)  there  were  $400,000  or 
$500,000,  all  of  which,  after  being  bartered  at  various  discounts,  be- 
came a  total  loss  to  the  last  holder,  which  in  most  cases  were  the  poorer 
and  less  informed  parts  of  the  community.  There  is  no  doubt  that 
thousands  of  farmers  will  be  ruined,  and  leave  their  families  in  pov- 
erty, in  consequence  of  the  facility  with  which  they  obtained  money 
at  the  banks  by  mortgaging  their  estates".^  The  directors  escaped 
from  the  state  and  from  punishment.  The  cashier  suffered  nothing 
worse  than  a  few  months'  imprisonment.  It  was  soon  afterwards 
announced  that  "the  bank  is  shut,  probably  never  to  be  opened  for  a 
similar  business.  The  sign  is  taken  down,  and  the  keys  are  in  the 
vicinity".^ 

The  case  of  the  Farmer's  Exchange  Bank  was  exceptional.  A  few 
other  instances  of  gross  mismanagement  will  be  noted  from  time  to 
time,  but  no  note  holder  or  depositor  of  any  other  Rhode  Island  bank 
ever  lost  a  dollar  until  after  the  Rebellion,  except  during  the  general 
suspension  of  specie  payments  in  1837-38,  and  in  1857-58.  The 
whole  losses  in  every  case  fell  on  the  stockholder,  and  as  in  most 
instances  such  stock  had  been  fraudulently  secured  and  fraudulently 
paid  for,  the  result  was  justice  rather  than  injustice.  The  Rhode 
Island  banks  which  were  managed  and  controlled  by  local  interests 
did  not  adopt  to  a  great  extent  the  plan  elsewhere  common  of  issuing 
large  sums  of  bills  and  sending  them  into  other  distant  states  for  use 
by  their  specially  appointed  agents.  The  practice  so  far  as  it  pre- 
vailed was  almost  wholly  confined  to  banks  owned  by  parties  outside 
the  state.  Outside  banks,  however,  had  agents  here.  The  Detroit 
Bank  had  an  office  of  discount  and  deposit  in  Providence,^  and  when 
it  became  bankrupt  some  of  the  bills  were  in  local  circulation.  About 
$200,000  of  the  notes  of  the  Eagle  Bank  of  Connecticut  were  in  circu- 
lation in  Rhode  Island  when  it  failed.  Rhode  Island  suffered  not  so 
much  from  the  depreciation  of  notes  issued  by  local  banks  as  by  the 
notes  of  banks  outside  the  state.  The  sellers  of  lottery  tickets  became 
money  changers,  and  the  association  of  the  two  lines  of  business  had  a 
large  degree  of  fitness. 

In  1805  the  issue  of  notes  by  private  parties  intended  for  circula- 
tion was  forbidden.  At  the  same  session  at  which  the  report  on  the 
Farmer's  Exchange  Bank  was  presented  the  legislature,  with  that 
post  mortem  sagacity  which  had  not  infrequently  characterized  its 
doings,  passed  a  law  defining  and  regulating  the  "process  against 

'History  of  Banking  in  all  the  Leading  Nations,  i,  38. 
''American,  March,  1809. 
^Gazette,  March,  1809. 


Chartered  Banking  in  Rhode  Island.  HI 

banks  and  insurance  companies".  Directors  were  made  personally 
liable  for  all  the  debts  of  the  bank  after  the  property  of  the  corpora- 
tion had  been  exhausted,  and  such  liability  was  enforceable  by  writ  of 
scire  facias.  The  amount  of  debts  of  a  bank  on  a  bond,  bill,  note  or 
other  contract,  was  limited  to  the  capital  stock  plus  the  deposits.^ 
Under  this  provision  the  circulation  could  not  exceed  the  amount  of 
the  capital  stock  plus  the  deposits.  No  bank  was  to  issue  a  bill  or  note 
for  a  less  sum  than  $50,  payable  out  of  the  state,  and  no  individual  was 
allowed  to  pass  a  bill  under  $5,  issued  by  a  bank  outside  the  state. 
Returns  were  required  of  the  banks  of  their  condition  on  some  one  of 
the  ten  days  preceding  October  3rd,  of  each  year. 

These  returns  made  on  a  day  selected  by  the  banks  themselves,  and 
fixed  within  certain  limits  for  a  year  in  advance,  were  of  course  no 
criterion  of  the  banks'  condition,  but  the  system  was  continued, 
with  some  modification  of  details,  until  1836,  when  returns  were  to  be 
made  on  a  day  set  by  the  bank  commissioners. 

In  October,  1809,  thirteen  of  the  banks  made  their  first  official 
report,  and  although  they  were  on  dress  parade,  some  light  is  thrown 
on  their  methods.  The  full  statistics  will  be  found  in  the  table  ac- 
companying this  chapter.  The  statement  that  with  $434,800  bills  in 
circulation,  they  had  in  their  vaults  $410,800  in  specie,  $79,000  of  the 
bills  of  other  banks  and  $88,200  deposited  in  other  banks,  thus  show- 
ing cash  assets  of  $143,000  in  excess  of  their  circulation,  evidenced  the 
misleading  character  of  the  statement  at  once.  It  would  indicate  that 
banks  which  were  founded  on  circulation  principle  and  with  the 
avowed  purpose  of  making  profits  from  such  issues,  had  abandoned 
their  chief  reason  for  existence,  had  in  their  vaults  more  circulating 
medium  than  they  had  issued,  and  were  making  their  dividends  solely 
from  the  loan  of  their  capital  and  deposits.  Four  of  the  banks  had 
more  specie  on  hand  than  the  amount  of  their  notes  issued.  The  Prov- 
idence Bank,  for  instance,  with  circulation  of  $64,800,  had  $111,100 
specie  in  its  vault,  $82,800  deposits  and  $438,400  of  discounts.  The 
Washington  Bank  had  $36,400  bills  out  and  only  $6,600  in  specie.  It 
had  $113  of  deposits  and  $69,000  of  discounts.  These  two  banks  are 
typical  of  the  difference  between  the  town  and  country  institutions, 
and  the  statement  of  the  latter  was  probably  much  more  nearly  the 
average  condition  of  the  banks  with  regard  to  specie  and  circulation. 
The  proportion  of  one  of  specie  to  six  of  circulation  was  not  at  the 
time  considered  excessive.  The  Rhode  Island  Union  Bank  of  Newport 
returned  among  its  liabilities  $630  sent  to  Philadelphia  to  be  put  in 
circulation.  The  $88,2C0  of  deposits  in  other  banks,  reported  at  the 
same  time,  coupled  with  the  thought  expressed  in  the  law  of  March 

^The  term  debts  here  being  used,  as  indeed  was  the  case  usually  until  1850, 
to  apply  only  to  obligations  due  to  the  public  in  the  form  of  deposits,  circula- 
tion and  small  amounts  sometimes  borrowed  from  other  banks  or  individuals. 


22  Chartered  Banking  in  Rhode  Island. 

prohibiting  the  issue  of  notes  of  small  denominations  payable  else- 
where, would  indicate  that  it  was  not  alone  in  this  practice. 

SECOND  period— 1809-1840, 

The  yeat  1809  marks  the  end  of  the  period  when  the  establishment 
of  banks  can  be  said  to  have  been  the  result  of  a  desire  on  part  of  their 
incorporators  to  promote  the  interests  of  the  community.^  Bank 
charters  were  thereafter  liberally  granted  for  personal  gain  and  were 
tossed  back  and  forth  through  the  two  branches  of  the  legislature  on 
the  plan  of  give  and  take.  The  second  period  of  banking,  lasting  from 
1809  to  1840,  was  marked  by  a  gradual  increase  of  supervision  by  the 
state;  and  various  restrictive  laws  as  to  loans  and  issues  of  circulation 
and,  by  spasmodic  and  for  brief  periods,  effective  attempts  to  stop  the 
wholesale  issue  of  charters.  Events  of  national  importance  had  their 
effect  in  the  local  field.  The  affairs  of  the  United  States  banks,  the 
war  of  1812,  the  embargo  act,  the  tariff  laws,  the  beginning  of  the 
Suffolk  system  of  note  redemption— all  materially  modified  the  charac- 
ter and  extent  of  local  banking. 

It  has  been  customary  in  writing  banking  history  to  treat  New 
England  as  a  whole  and  compare  it  with  the  western  states,  thus 
emphasizing  only  points  of  difference  in  the  amount  of  circulation 
and  methods  of  redemption.  In  such  a  treatment,  however,  much  of 
the  economic  relation  of  certain  important  phases  of  banking  in  New 
England  has  failed  to  receive  due  consideration.  A  more  complete 
separation  of  the  New  England  states  into  groups  will  illustrate 
statistically  fundamental  points  of  difference.  For  this  purpose  the 
three  northern  states  form  one  group ;  the  three  southern  states  form 
another  group.  A  comparison  of  these  two  groups  shows  that  in  the 
southern  tier  of  states,  during  the  whole  of  the  period  from  about  1810 
to  1865,  the  circulation  function  of  banking  based  on  the  circulation 
principle  had  given  way  to  the  circulation  function  based  upon  the 
banking  principle.  This  condition  manifests  itself  in  the  fact  that  in 
these  states  the  amount  of  the  capital  stock  in  banks,  and  not  the 
amount  ol  their  circulating  notes,  was  the  most  distinguishing  charac- 
teristic. It  will  be  seen  from  the  subjoined  statistics  that  the  propor- 
tion of  their  circulating  notes  to  their  capital  stock  was  very  small, 
when  compared  with  the  three  northern  states ;  and  should  a  compari- 
son be  made  with  the  western  states,  the  characteristic  would  even  be 
more  marked.  It  followed,  of  course,  that  the  function  of  banking  in 
discounting  by  means  of  capital,  rather  than  by  means  of  note  issues, 
was  also  their  distinguishing  feature. 

The  following  figures  have  been  selected  because  of  their  availa- 
bility and  not  for  any  peculiarity  due  to  a  difference  in  dates.     They 

^Bank  charters  were  inserted  in  the  Digest  of  General  Laws  in  1798.  In 
Connecticut  they  were  Incorporated  in  the  General  Laws  as  late  as  1821. 


Chartered  Banking  in  Rhode  Island.  23 

are  typical  of  the  whole  period  covered.       The  figures  are  given  in 
millions  and  thousands  only,  000  being  omitted. 

O  O  Q  Q  O^o-S 

Maine 1820  $1,600,  $1,400,  $  $  88 

New  Hampshire .vl831  2,000,  1,100,  2,900,  270,  55 

Vermont    1834  920,  1,460,  1,900,  180,  159 

Average 88 

Massachusetts     1820  10,600,  2,600,  13,500,  3,200,  25 

Rhode  Island 1821  3,200,  675,  3,100,  460,  21 

Connecticut  1834  6,800,  2,400,  8,300,  1,200,  35 

Average 32 

1855. 

Maine    7,300,  5,100,  12,700,  2,500,  70 

New  Hampshire 4,400,  3,600,  8,000,  950,  82 

Vermont    3,600,  3,700,  6,700,  800,  103 

Average •  80 

Massachusetts 58,600,  23,l00,  99,500,  21,900,  39 

Rhode  Island 18,700,  5,400,  26,400,  2,900,  29 

Connecticut    17,100,  6,800,  23,700,  3,400,  40 

Average 37 

The  facts  here  shown  with  regard  to  the  three  southern  New 
England  States  are  more  particularly  true  of  Rhode  Island  than  the 
other  two  states,  its  percentage  of  circulation  to  capital  having  been 
four  per  cent,  less  than  that  of  Massachusetts  in  1821  and  ten  per  cent, 
less  in  1855.  To  the  extent  of  its  superiority  in  these  respects  is  it  true 
that  Rhode  Island  banking  was  based  more  on  real  capital  than  any 
other  state  in  the  Union.  The  facts  are  the  more  remarkable,  because 
the  restrictive  laws  relating  to  circulation,  while  different  in  point  of 
time  of  enactment  in  the  New  England  states,  were  very  similar  in 
their  provision ;  because  the  Suffolk  system  of  redemptions  prevailed 
throughout  all  alike,  and  because  precisely  the  same  methods  of  paying 
for  capital  stock  by  means  of  stock  notes  were  adopted  everywhere. 
It  is  further  true  as  regard  the  laws  limiting  the  amount/ of  a  bank's 
indebtedness  and  its  circulation,  that  they  had  little  effect,  because  in 
none  of  these  six  states  were  the  limits  set  by  statute  approached  by 
the  banks  (except  of  course  in  a  few  cases  of  noteworthy  mismanage- 
ment). From  this  fact  we  may  also  conclude  that  here  the  development 
of  banking  was  to  a  large  degree  a  normal  adaptation  of  banks  to  the 
business  needs  of  their  respective  communities.  And  finally,  if  we 
accept  the  fact  that  inflation  was  the  most  common  characteristic  of 
all  banking  at  this  time,  it  remains  to  be  explained  why  the  inflation 


24  Chartered  Banking  in  Rhode  Island. 

of  Rhode  Island  and  its  two  neighboring  states  to  a  nearly  equal  degree, 
expressed  itself  in  the  form  of  capital  stock  rather  than  in  the  form  of 
note  issues.  This  explanation  will  be  found  in  local  economic  condi- 
tions, of  which  banking  was  but  a  part,  and  partly  in  the  methods 
adopted  among  the  banks  themselves  for  restricting  currency  issues. 
We  shall  treat  of  the  latter  topic  first. 

In  1809,  when  the  western  state  banks  were  suspending  specie  pay- 
ments, the  ' '  bank  thermometer ' '  of  Rhode  Island  announced  that  the 
bills  of  all  state  banks  were  redeemable  in  specie  except  the  Smithfield 
Union,  which  paid  with  checks  at  thirty  days '  sight  on  Boston,  ' '  with 
interest  in  advance".  The  circulation  of  the  banks  was  not  large  in 
comparison  with  other  states  and  when,  owing  to  the  expiration  of  its 
charter  in  1811,  the  bills  of  the  first  United  States  Bank  were  with- 
drawn, local  circulation  was  issued  to  take  its  place.^  The  issues  in- 
creased from  $460,000  in  1811  to  $770,000  in  1813.  Circulation  was 
increased  in  other  states  in  even  greater  proportion.  There  was  a 
great  redundancy  of  bills  in  Boston.  They  depreciated  from  one  per 
cen^.  to  five  per  cent.  The  Boston  money  changers  reaped  a  harvest. 
The  exchanges  of  bills  reached  $100,000  a  day,  and  the  annual  cost  to 
note  holders  was  estimated  at  $120,000  in  that  city  alone.  The  condi- 
tion paved  the  way  for  the  action  of  the  New  England  Bank  of  Boston, 
which  advertised  to  receive  bills  at  a  discount  equal  to  the  cost  of  send- 
ing them  home  for  redemption.  The  Rhode  Island  banks  were  accessi- 
ble, and  under  the  influence  of  the  redemption  system,  their  issue 
decreased  from  $770,000  to  $549,000  in  one  year.  Thus,  when  in  con- 
sequence of  excessive  issues,  all  the  banks  outside  of  New  England 
suspended  in  August,  1814,  the  local  banks  had  already  reduced  their 
circulation  to  such  a  point  that  not  only  was  there  no  thought  of  sus- 
pension, but  the  circulation  was  increased  $30,000,  and  this,  although 
at  the  same  time  the  specie  holdings  of  the  banks  had  decreased 
$80,000.  The  New  England  Bank  system,  which  had  reduced  rates  of 
discount  on  bills  to  about  one  per  cent,  from  1814  to  1818,  was  the  cause 
of  the  inauguration  of  the  Suffolk  Bank  System  of  redemptions  in 
1819.  The  Suffolk  Bank  offered  to  redeem  the  bills  of  any  bank, 
charging  therefor  the  same  price  which  it  paid,  provided  the  bank 
would  keep  a  permanent  deposit  of  $5,000  with  it.  The  deposit  of 
$5,000  was  not  required  of  the  banks  of  Providence  and  Newport, 
which  already  had  accounts  with  the  Suffolk,  provided  they  would 
keep  all  their  deposits  with  it  and  have  money  enough  to  redeem  their 
bills  at  all  times.  The  Merchants  Bank  of  Providence  became  the 
satellite  of  the  Suffolk  and  handled  its  Rhode  Island  business.  It 
made  arrangements  with  most  of  the  state  banks  to  redeem  for  them 

'It  was  estimated  that  $24,000,000  of  the  $50,000,000  circulation  in  the  country 
was  of  the  United  States  bank  notes. 


Chartered  Banking  in  Rhode  Island. 


%5 


the  bills  of  all  other  banks  except  those  located  in  the  same  town.  For 
this  purpose  it  issued  much  of  its  circulation  in  the  form  of  large  bills 
from  $100  to  $1,000  and  had  an  understanding,  though  not  an  agree- 
ment, with  its  associated  banks  that  such  bills,  when  received  by  the 
latter  in  course  of  their  business,  would  be  retained  by  them  and  would 
not  be  presented  for  redemption  in  specie,  but  only  in  payment  for 
their  own  notes,  which  the  Merchants  had  received  from  out  of  town 
banks  for  redemption.  The  Suffolk  Bank  soon  improved  upon  its 
original  system  and  agreed  to  receive  at  par  from  its  allied  banks  all 
the  bills  of  other  banks  in  good  standing,  modifying  at  the  same  time 
the  $5,000  deposit  to  suit  the  condition  of  each  bank.  The  system  was 
received  with  bitter  denunciation  by  many  of  the  country  banks,  as  it 
compelled  them  to  keep  a  larger  specie  reserve  and  at  the  same  time 
reduced  their  circulation  and  the  profits  from  it.  The  association  of 
banks  was  derided  as  the  ' '  Holy  Alliance ' '.  Some  Rhode  Island  banks 
refused  to  join.  They  were  the  Cranston,  Kent,  Village,  and  the  Fall 
River  Union  Banks.  As  the  first  three  of  these  banks  had,  in  1819,  a 
combined  capital  of  $46,600,  a  circulation  of  $50,800,  the  reason  for 
their  opposition  and  that  of  many  like  them  in  other  states  was  mani- 
fest. A  few  of  the  banks  had  been  not  only  making  high  profits  out  of 
excessive  issues  of  circulation,  but  they  had  also  reaped  large  gains  by 
buying  their  own  bills,  through  their  agents,  at  a  discount.  Their  most 
serious  grievance,  therefore,  was  that  their  paper  was  raised  to  par  by 
the  redemption  system  and  they  were  deprived  of  their  profits  on  its 
depreciation. 

The  sub-system  established  by  the  Merchants  Bank  simplified  the 
redemption  of  all  bank  bills  by  Rhode  Island  banks,  but  it  had  other 
additional  merits  over  the  Suffolk  system.  It  covered  a  compact  and 
easily  accessible  territory.  Its  refusal  to  receive  from  any  bank  the 
bills  of  other  banks  in  the  same  town,  left  to  each  bank  the  care  for  its 
own  circulation  by  frequent  redemptions  of  the  bills  of  its  immediate 
local  competitors,  while  it  cared  for  the  redemptions  of  the  banks  by 
groups  in  each  town.  Like  the  earliest  government  in  Rhode  Island, 
it  provided  for  complete  local  autonomy  of  the  banks  while  it  managed 
their  intertown  relations.  This  development  of  the  system  was  pecul- 
iar to  Rhode  Island.  Within  state  limits  it  facilitated  and  accelerated 
redemptions  to  a  degree  nowhere  else  possible.  Toward  the  close  of 
the  era  of  state  banks,  when  nearly  one  hundred  banks  were  issuing 
circulation  varying  from  $3,500,000  to  $5,300,000,  the  average  local 
life  of  a  bill  did  not  exceed  a  fortnight.^  The  rapidity  of  circulation 
and  redemption  rendered  greatinflation  impossible.  An  ardent  admirer 
of  the  Boston  plan  says  that,  starting  almost  without  outside  support, 

'The  author  is  indebted  for  this  fact,  as  well  as  for  many  others  of  the  great- 
est value  relating  to  local  banking,  to  George  C.  Noyes,  Esq. ,  for  many  years 
associated  with  the  Globe  Bank  of  Providence. 


26  Chartered  Banking  in  Rhode  Island. 

' '  assisted  by  no  law,  progressing  tentatively  as  each  necessity  prompted 
the  invention  of  new  means  to  meet  it",  the  Suffolk  Bank  evolved  a 
system,  "under  which,  to  an  extent  never  approached  in  its  efficiency 
by  any  plan  elsewhere  created  by  law,  the  bank  note  currency  of  New 
England  was  made  elastic,  safe  and  ideally  convenient  and  inexpensive 
in  use".^  While  such  a  statement  may  not  be  received  without  some 
limitations,  it  is  nevertheless  true  that  the  system  received  its  most 
perfect  exemplification  in  Rhode  Island.  The  bank  process  had  been 
invented  by  the  projectors  of  the  Providence  Bank  to  compel  improvi- 
dent individuals  to  be  honest  with  the  bank.  The  Suffolk  system  com- 
pelled the  banks  to  be  honest  with  each  other. 

The  successful  operation  of  the  system  in  the  southern  New  England 
states  as  compared  with  their  northern  states  was  largely  due  to  con- 
centration of  the  banking  institutions  in  localities  reached  by  easy 
means  of  communication,  and  the  very  contrast  between  it  and  the 
northern  sections  in  the  amount  of  circulation  which  they  kept  out  in 
proportion  to  their  capital,  though  all  were  subject  to  the  same  general 
system,  would  indicate  that  without  important  modifications  the  Suf- 
folk plan  could  not  have  been  projected  upon  the  whole  United  States. 
But  within  its  sphere,  however,  it  was  an  efficient  mechanism,  and 
because  of  it  as  a  purely  self-centered  expedient  and  not  because  of 
restrictive  laws,  it  was  almost  impossible  for  the  banks  of  southern 
New  England  to  keep  in  circulation  excessive  issues  of  bills,  and  there- 
fore from  causes  operating  within  the  banks  themselves,  the  issue  of 
currency  on  the  circulation  principle  was  impracticable.  With  a  few 
such  exceptions  as  have  been  noted  of  country  banks,'  and  they  were 
not  types  of  any  importance,  the  banks  of  Rhode  Island  never  issued 
circulation  exceeding  one-third  and  on  the  average  not  to  exceed  one- 
fifth  of  their  nominal  capital  stock.  Recalling  the  large  profits  of  the 
business  by  means  of  which  real  capital  was  quickly  accumulated,  it  is 
probable  that  at  no  time  did  the  note  issues  exceed  one-half  the  actual 
capital  stock  and  at  no  time  approached  a  condition  where  it  could  be 
said  to  have  been  issued  on  the  simple  credit  of  the  issuer.  In  fact, 
the  theory  that  the  amount  of  circulation  safely  issuable  is  governed  by 
the  demand  of  the  community,  regardless  of  the  assets  of  the  issuer, 
though  avowed  by  the  community  in  1791,  was  never  put  in  practice 
by  John  Brown  or  any  of  his  successors  in  legitimate  banking  in  the 
state. 

While,  therefore,  the  value  of  the  Suffolk  system  as  a  check  to 
swindlers  may  be  acknowledged,  the  real  reason  for  the  small  issues  of 
circulation  in  Rhode  Island  and  the  large  issues  of  capital  stock  must 
be  found  in  the  character  of  the  business  which  the  banks  performed. 
It  has  been  noted  that  long  time  loans  on  land  or  accommodation  loans 

•Whitney.     The  Suffolk  Bank. 


Chartered  Banking  in  Rhode  Island.  27 

are  incompatible  with  the  issue  of  circulation.  It  has  also  been  ob- 
served that  the  commercial  enterprises  of  the  merchants  and  the  long 
periods  occupied  by  their  sea  ventures  made  their  notes  very  similar  to 
accommodation  paper  and  that  much  of  the  paper  discounted  during 
the  first  fifteen  years  of  chartered  banking  was  of  that  nature.  The 
men,  therefore,  who  projected  these  banks  had  much  more  to  gain  by 
securing  a  large  line  of  permanent  or  renewable  discounts  than  by  the 
issue  of  large  amounts  of  bills,  the  redemption  of  which  at  any  time 
might  necessitate  the  paying  of  their  loans.  The  actual  payment  by 
specie  and  bonds  for  the  stock  of  the  Providence  Bank  and  others  at 
first  formed  gave  the  directors  the  real  capital  with  which  to  make 
such  loans. 

The  embargo  of  1807,  the  war  of  1812,  and  the  tariff  act  of  1816  laid 
the  foundation  of  New  England  manufactures,  and  they  succeeded  to 
the  commerce  which  had  been  ruined  by  the  embargo.  While  the 
consumption  of  cotton  was  10,000  bales  in  1810,  it  was  90,000  bales  in 
1815.  In  1816  the  value  of  cotton  goods  manufactured  within  a  circle 
of  thirty  miles  surrounding  Providence  was  $3,500,000:  about  one- 
fourth  of  the  total  consumption  of  cotton,  or  25,000  bales,  found  a 
market  here.  New  England,  and  especially  Rhode  Island,  was  manu- 
facturing for  the  whole  country.  Specie  flowed  here  and  the  west  was 
drained.  In  New  York  exchange  on  Boston  was  uniformly  at  a  pre- 
mium. In  1813  it  was  one-half  per  cent.,  and  by  January,  1815,  it  had 
reached  23  per  cent.  It  fell  in  1816  to  one  and  one-half  per  cent.^ 
When  the  Southern  Bank  of  Baltimore,  followed  by  the  banks  of  Phila- 
delphia and  New  York,  suspended  in  1814,  they  were  debtors  to  the 
manufacturers  of  Providence  and  the  territory  immediately  surround- 
ing it  to  the  extent  of  $1,000,000.  Owing  to  the  depreciation  of  their 
bills  and  their  refusal  to  pay  interest  on  their  obligations,  on  which 
payment  was  deferred,  the  manufacturers  of  New  England  were  com- 
pelled to  accept  a  loss  of  from  10  per  cent,  to  15  per  cent,  on  the 
moneys  due  them,^  and  although  for  the  time  being  the  loss  hampered 
local  industry,  the  enormous  profits  of  from  $1  to  $8  a  yard  on  woolen 
goods  and  almost  proportional  profits  on  cotton  soon  recouped  the 
losses. 

For  a  community  thus  industrially  situated  fictitious  circulation  had 
no  advantage.  Real  capital  was  necessary,  and  though  it  was  rapidly 
being  created,  the  manufacturers  took  advantage  of  every  opportunity 
to  borrow  in  other  markets.  The  banks  in  southern  Massachusetts  and 
eastern  Connecticut  were  heavy  loaners  to  Providence  merchants. 
When  in  1816  the  project  of  a  United  States  bank  was  again  broached 
as  a  regulator  of  the  currency,  and  the  circulation  banks  throughout 

'United  States  Treasury  Report,  1818. 
*R.  I.  Hist.  Society  Mss.  "Banks." 


28 


Chartered  Banking  in  Rhode  Island. 


the  country  were  opposing  it,  Providence  manufacturers  and  bankers 
requested  that  a  branch  might  be  established  here.^  The  first  signa- 
tures to  the  request  were  those  of  the  Browns  and  their  associates. 
A  branch  was  desired  for  the  facilities  which  it  would  offer  for  dis- 
count. It  was  established  in  1817  and  Phillip  Allen,  then  closely  asso- 
ciated with  the  interests  of  the  Browns,  was  selected  as  its  president. 
In  September,  1819,  it  had  local  discounts  amounting  to  $374,000,  but 


Office  of  the  Second  United  States  Bank 

The  Providence  branch  of  the  Second  United  States  Bank  was  in  this  building,  at 
number  23  and  subsequently  at  number  25  South  Main  St.  This  was  the  favorite  busi- 
ness street  and  in  1840  the  American,  the  Globe,  the  Blackstone  Canal  and  the 
Mechanics  Banks  were  located  in  this  and  the  adjoining  building. 


although  it  had  in  its  vaults  $225,000  of  its  own  notes,  the  amount  of 
them  which  it  had  succeeded  in  getting  into  circulation  was  only 
$38,300.2 

The  length  of  time  required  for  these  loans  is  scarcely  now  compre- 
hensible. This  process  is  thus  quaintly  but  clearly  described  by  an 
active  participator  in  it.     The  "merchandise  being  sold  on  credit  of 

^Moses  Brown  Papers,  Oct.,  1816. 
"United  States  Treasury  Report,  1819. 


Chartered  Banking  in  Rhode  Island.  29 

from  four  to  six  months,  chiefly  the  latter,  the  notes  which  the  con- 
signees .receive  for  it,  when  sold,  must  be  discounted  at  the  banks  to 
meet  the  drafts  of  the  shippers,  payable  at  sight,  or  at  very  short  dates. 
And  these  notes  again,  such  of  them  as  are  given  for  the  raw  materials 
for  manufacturers,  when  they  fall  due,  are  taken  up  by  further  dis- 
counts of  the  drafts  of  the  manufacturers  on  their  distant  agents,  pay- 
able some  months  still  later  than  the  notes  were.  It  is  this  great  length 
of  time  between  the  advances  made  by  the  banks,  for  which  specie  is 
required  in  all  periods  of  pressure,  and  the  return  of  the  money  to 
them,  that  limits  the  aid  they  can  afford  in  the  transaction  of  business 
to  less  than  one-half  of  what  they  might  give  if  the  notes  and  drafts 
discounted  by  them  were  payable  in  sixty  days".^  The  nature  and 
character  of  its  industry  was  such  that  Rhode  Island  like  a  sponge 
sucked  up  available  banking  capital  from  everywhere,  and  such  were 
the  rates  of  discount,  reaching  in  times  of  stress  as  high  as  24  per  cent, 
and  36  per  cent,  and  normally  averaging  12  per  cent.,  which  the  manu- 
facturers could  afford  to  pay,  that  the  profits  on  banking  soon  turned 
stock  notes  into  real  capital.  Just  as  the  banks  were  the  necessary 
adjuncts  of  the  insurance  companies  in  the  earlier  years,  so  they  were 
from  this  time  forward  necessary  attendants  of  the  growing  manufac- 
turing industries  of  the  state.  If  the  large  profits  then  received,  the 
nature  of  the  exchanges  and  discounts  and  the  character  of  the  local 
industrial  organization  are  considered,  it  will  be  seen  that,  though 
nominal  banking  capital  seemed  to  savor  of  inflation,  banking  in  fact 
did  not  absorb  more  than  its  due  proportion  of  the  increase  in  real 
capital.  In  the  absence  of  any  deposit  banking,  in  the  present  use  of 
the  term,  and  because  of  the  unfitness  of  circulation  banking,  banking 
on  capital  stock  was  the  only  means  by  which  industry  could  secure  its 
necessary  discount  accommodation.  On  the  other  hand  the  very  pros- 
perity of  that  industry  kept  the  balance  of  trade  in  favor  of  New  Eng- 
land and  drew  to  Rhode  Island  banks,  until  1850,  an  abundant  stock 
of  coin,  which  at  no  time  fell  below  40  per  cent,  of  their  circulation, 
and  w^as  usually  much  above  that  proportion.^ 

^Report  on  Banking  Capital,  1826. 

''It  has  been  assumed  that  a  large  amount  of  capital  from  outside  the  state 
was  invested  in  bank  stock  in  Rhode  Island  because  of  its  peculiarly  liberal 
banking  laws.  There  are  now  few  available  evidences  of  such  investments. 
In  so  far  as  the  practice  is  known  to  have  prevailed  it  was  almost  wholly 
confined  to  a  few  of  the  "circulation"  banks  of  the  country  towns,  the  con- 
trol of  which  was  sought  for  fraudulent  purposes.  The  stock  of  the  commer- 
cial and  profitable  banks  was  jealously  guarded,  for  the  obvious  reason  stated 
in  the  text;  that  they  were  the  fiscal  agents  of  the  industrial  corporations  and 
were  largely  owned  by  the  men  whose  enterprises  they  aided.  The  capital 
of  Rhode  Island  banks,  at  least  until  1850,  was  created  by  their  earnings. 

Nevertheless  the  liberality  of  Rhode  Island  banking  laws  was  notorious. 
Connecticut  bank  charters  were  always  subject  to  amendment  or  revocation; 
they  usually  contained  clauses  reserving  to  the  state  and  charitable  institu- 
tions the  right  to  subscribe  to  bank  stocks.    The  state  distributed  among  its 


30  Chartered  Banking  in  Rhode  Island. 

The  success  of  the  banks  led  to  their  rapid  increase  from  thirteen 
in  1809,  with  a  capital  of  $1,535,000  and  discounts  of  $2,000,000,  to 
forty-four  in  1826,  with  a  capital  of  $5,570,800  and  discounts  of 
$6,217,800.  So  many  charters  were  applied  for  in  the  latter  year  and 
the  attendant  circumstances  were  so  suspicious  that  a  committee  was 
appointed  to  report  on  the  question  of  the  increase  of  banking  capital 
in  the  state.  A  brief  account  of  the  laws  and  charter  provisions  to 
1826  will  aid  in  understanding  their  report. 

The  charter  of  the  Union  Bank,  dated  1814,  was  the  first  to  increase 
the  stockholders'  liability  beyond  the  amount  of  his  investment.  By 
its  terms  stockholders  were  personally  liable  if  the  directors  violated 
the  bank  process  act  of  1809.  At  the  February  session  of  the  legisla- 
ture in  1818  the  bank  process  act  was  amended  in  several  particulars, 
but  while  the  committee  was  considering  the  nature  of  the  changes 
necessary,  charters  for  ten  banks  were  granted,  each  containing  the 
original  form  of  the  bank  process  power  against  its  debtors.  Two  of 
the  banks,  the  Merchants  and  Eagle,  were  to  be  located  in  Providence, 
but  most  of  this  batch  of  charters  were  granted  to  country  towns  and 
to  incorporators  who  had  no  other  purpose  in  view  than  to  dispose  of 
them  for  a  good  price,  because  they  conveyed  valuable  privileges.  At 
the  October  session  of  the  same  year  two  charters  were  issued  whose 
history  illustrates  this  fact.  The  New  England  Pacific  Bank  of 
Smithfield  was  not  legally  organized,  and  in  1820,  some  years  after 
irregularities  of  its  incorporators  had  voided  the  charter,  it  was  sold 
to  innocent  parties  outside  the  state.  The  sum  paid  for  it  was  said  to 
be  $1,000.  The  legislature  passed  amendments  to  its  charter  in  1826, 
and  the  bank  as  the  Pacific  had  a  subsequent  honorable  career.  The 
Burrillville  Bank  was  chartered  at  the  same  time.  New  York  parties, 
in  collusion  with  one  of  its  directors,  attempted  and  nearly  succeeded 
in  getting  control  of  it  for  ' '  circulation ' '  purposes,  but  the  scheme  was 

banks  a  large  portion  of  its  receipts  from  the  United  States  in  payment  of 
its  revolutionary  debts,  and  thus  also  acquired  direct  interest  in  its  banks, 
and  they  were  subject  to  rigid  inspection  in  consequence  in  1803.  It  taxed 
them  on  their  capital  and  charged  a  large  bonus  on  incorporation.  Massa- 
chusetts also  began  a  system  of  strict  state  supervision  in  1803.  Its  banks 
were  prohibited  from  engaging  in  commerce  and  trade.  The  charters  re- 
served to  the  state  the  right  to  tax  them  and  to  increase  their  taxes.  These 
taxes  early  (viz. :  1814)  were  one-half  per  cent,  on  the  capital  stock  and  a  large 
bonus.  Their  circulation  was  limited  at  about  the  same  time  to  50  per  cent, 
of  their  capital,  and  a  little  later  the  loans  to  directors  were  limited  to  30  per 
cent,  of  the  capital,  while  in  1809  a  penalty  of  two  per  cent,  was  imposed  on 
banks  for  failure  to  redeem  bills  on  demand  in  specie.  The  charters  were 
always  terminable  usually  in  twenty  or  thirty  yeai's.  The  charters  of  Rhode 
Island  were  perpetual.  Until  1837  circulation  could  equal  the  capital.  Taxes 
of  one-twentieth  per  cent. ,  first  imposed  in  1822,  were  increased  to  one-fourth 
per  cent,  in  1836  and  one-third  per  cent,  in  1855,  but  did  not  at  any  time 
exceed  that  sum.  The  Rhode  Island  banks  had  the  bank  process  power,  but 
a  very  similar  power  was  enjoyed  by  the  Vermont,  banks  under  a  law  of  1809. 


Chartered  Banking  in  Rhode  Island.  31 

discovered  and  stopped  in  1827.  It  was  a  typical  country  bank,  show- 
ing in  1826  capital  $31,400,  circulation  $27,800. 

The  amendments  of  1818  to  the  bank  process  of  1809  affected  mainly 
the  debtors  of  banks.  The  power  of  summary  judgment  and  execu- 
tion, whfch  had  been  granted  to  all  banks  by  the  terms  of  their  char- 
ters, was  repealed  and  the  collection  of  the  debts  due  them  was  con- 
fined to  the  regular  legal  i)rocesses,  with  the  exception  that  while  in 
the  ordinary  procedure  a  creditor  had  recourse  first  to  the  person  of 
debtor,  then  to  his  personal  estate,  and  lastly  to  his  real  estate,  banks 
were  given  power  to  at  once  attach  the  property  of  the  debtor.  This 
act  had  a  suggestive  history.  It  was  passed  at  a  time  when  the  state 
was  in  the  midst  of  an  industrial  depression,  more  severe  than  had 
been  before  experienced  since  the  Eevolution,  and  when,  therefore,  the 
summary  execution  of  the  original  bank  process  power  could  have 
caused  great  injustice.  These  years  were  prolific  in  the  discussion 
and  passage  of  acts  for  the  relief  of  insolvent  debtors.  The  amend- 
ments to  the  bank  process  power  may  therefore  have  been  partly  the 
result  of  peculiar  economic  conditions.  Moreover  by  this  time  there 
was  a  general  sentiment  among  the  stronger  banks  that  the  power  was 
unnecessary  and  they  were  not  unwilling  to  dispense  with  it. 

In  1819  the  Dartmouth  College  case  was  interpreted  as  endowing  a 
charter  of  incorporation  with  the  character  of  contract.  The  inviolabil- 
ity of  this  constitutional  right  became  the  basis  of  court  decisions  re- 
lating to  banks  for  many  years.  The  original  bank  process  power  was 
a  charter  right,  and  the  statute  of  1818  repealing  it  was,  therefore,  of 
doubtful  legality.  This  statute  contained  two  clauses  relating  to  this 
subject.  One  provided  a  new  form  of  the  bank  process,  and  another 
repealed  all  then  existing  bank  process  powers.  In  the  revision  of  the 
laws  in  1822  there  was  a  general  act  of  repeal,  and  the  bank  process 
power,  as  defined  in  the  law  of  1818,  was  re-enacted,  to  continue  in 
force  until  January  1,  1823.  It  was  expressly  provided  that  all  char- 
ters theretofore  granted  should  remain  in  full  force.  The  revival  of 
the  original  bank  process  power  in  1823,  therefore,  seems  to  have  been 
a  concession  to  the  then  prevailing  notion  of  the  constitutional  rights 
of  contract,  rather  than  the  result  of  any  effort  to  re-introduce  this 
provision  into  actual  practice.  No  charter  subsequent  to  1818  con- 
tained the  original  bank  process  power.  In  1826,  as  we  shall  see,  it 
was  generally  regretted  that  such  a  power  had  ever  been  granted  to 
the  banks.  In  1836  another  law  was  passed,  repealing  all  special  forms 
of  process  against  the  debtors  of  banks,  and  the  lack  of  constitution- 
ality of  such  a  statute  was  tacitly  ignored  in  the  universal  desire  to 
repeal  the  obnoxious  charter  right.  We  may,  therefore,  conclude  that 
its  continuance  in  nominal  force  from  1823  to  1836  was  the  result  of  the 
then  strong  sentiment  in  favor  of  upholding  every  vestige  of  constitu- 


32  Chartered  Banking  in  Rhode  Island. 

tional  right,  just  as  the  ready  acquiescence  in  its  repeal  in  1836  was 
made  possible  by  the  decadence  of  that  sentiment  under  the  Jacksonian 
democracy.  The  practical  repeal  of  the  bank  process  power  dates  in 
1818,  when  the  strong  and  commercial  banks  in  the  large  towns,  both 
by  their  own  industrial  association  and  because  of  the  results  of  the 
currency  inflation  throughout  the  west,  had  already  become  convinced 
that  the  issue  of  a  large  circulation  on  the  credit  of  the  issuer  or  on 
assets  of  a  contingent  character,  was  not  within  the  scope  of  their 
functions.  The  power  which  had  been  evoked  for  the  purpose  of  pro- 
tecting circulation  of  that  character  had,  therefore,  lost  its  chief  reason 
for  existence. 

In  June,  1820,  banks  were  prohibited  from  issuing  circulation  in 
excess  of  the  paid  up  capital. 

No  further  legislation  of  importance  relating  to  banking  was  enacted 
until  after  the  report  on  banking  capital  in  1826. 

The  numerous  petitions  for  bank  charters  during  the  few  years  pre- 
ceding 1826  and  culminating  in  that  year— fourteen  charters  having 
been  granted  by  Massachusetts,  eighteen  having  been  petitioned  for 
and  refused  in  Ehode  Island,  an  increase  in  the  capital  of  six  having 
been  also  refused — were  believed  to  be  the  result  of  world-wide  phe- 
nomena. The  central  fact  of  these  phenomena  was  a  disproportionate 
conversion  of  circulating  capital  into  fixed  capital.  Subsequent  to 
the  Napoleonic  wars  large  amounts  of  capital  were  attracted  to  many 
enterprises  in  South  America  and  Mexico  by  the  increased  production 
of  silver.  Within  the  United  States  the  surplus  of  dormant  and  circu- 
lating capital,  which  had  ceased  to  find  an  outlet  in  manufacturing 
enterprises  after  the  depression  of  1818-1819,  had  created  a  field  for 
itself  in  fostering  large  public  improvements  and  speculative  projects, 
an  illustration  of  which  in  Rhode  Island  was  the  Blackstone  Canal 
from  Providence  to  Worcester,  begun  in  1823,  the  stock  of  which  was 
subscribed  three  times  over.  To  add  to  these  economic  facts,  owing 
to  an  overvaluation  of  silver  as  compared  with  gold,  the  latter  had 
disappeared  from  circulation  in  1817,  and  in  1823  the  scarcity  of 
money  metals  led  to  the  act  of  congress  declaring  many  foreign  coins 
receivable  for  public  lands.  The  currency  of  the  United  States 
Bank,  from  which  so  much  had  been  expected,  had  not  been  received 
with  eagerness  by  the  public.  Everywhere  there  were  evidences  of  a 
change  in  the  form  of  capital  and  a  consequent  relative  absence  of  real 
money.  Indeed,  these  were  the  beginnings  of  the  movement  which 
was  temporarily  checked  by  restrictive  laws  relating  to  banking,  and 
which,  fanned  into  flame  by  the  caprice  of  Jackson  in  1832,  culminated 
in  1837.  As  usua],  the  lack  of  circulating  capital  and  the  high  rates 
of  discount  were  mistaken  for  a  lack  of  banking  capital  and  of  circulat- 
ing money  media.     The  forty-four  existing  banks  of  Rhode  Island  had 


Chartered  Banking  in  Rhode  Island.  33 

authorized  capitals  amounting  to  $10,350,000.  The  additions  to  this 
sum  requested  May,  1826,  by  new  banks  and  increases  to  the  capital 
of  old  banks  would  have  raised  the  total  authorized  capital  to  $16,600,- 
000.  A  committee,  of  which  Benjamin  Hazard  was  chairman,  to  which 
the  petitions  were  referred  by  the  legislature,  rendered  a  report  in 
June.  The  document  is  the  ablest  contribution  to  the  theory  and  prac- 
tice of  banking  in  the  state  now  extant.  It  appeared  that  most  of  the 
charters  were  asked  for  by  those  who  lived  in  the  agricultural  sections 
of  the  state,  where  loans,  if  made,  must  be  permanent  and  could  not, 
therefore,  be  a  safe  security  for  circulation.  Mr.  Hazard's  chief 
objection  to  the  issue  of  more  charters  was  the  fact  that  the  subscrip- 
tions for  the  stock,  being  paid  for  wholly  by  stock  notes,  would 
add  nothing  whatever  to  the  real  capital  of  the  state.  The  extent  to 
which  this  habit  had  been  carried  by  this  time  was  remarkable.  The 
charters  usually  provided  that  the  capital  should  be  "paid  in"  specie, 
but  while  these  clauses  were  followed  in  the  letter  they  were  evaded  in 
spirit.  The  specie  paid  in  one  day,  and  usually  borrowed  from  some 
existing  bank  for  the  purpose,  was  withdrawn  the  next  day  and  the 
notes  of  the  stockholders  substituted.  At  the  payment  of  each  succes- 
sive installment  the  process  was  repeated.  Such  notes  were  called 
stock  notes,  because  by  general  law  and  by  terms  of  the  charters  the 
stock  of  a  stockholder  was  liable  for  his  obligations  to  the  bank.  Said 
Mr.  Hazard:  "The  notes  given  for  the  stock  and  the  stock  pledged 
for  the  notes,  cancel  and  annul  each  other;  or  rather,  they  are  both 
nullities  from  the  beginning.  If  ten  individuals  were  to  form  them- 
selves into  a  company  for  the  purpose  of  getting  up  a  bank  with  a 
capital  of  50,000  dollars,  and  each  member  should  give  his  note,  and 
nothing  else,  to  his  company  for  his  share  of  the  stock,  it  is  evident 
enough  that  here  would  not  be  one  cent  of  real  capital ;  and  that  if 
such  a  company  should  proceed  to  loan  out  its  bills  on  interest,  and 
put  them  into  circulation,  it  would  be  guilty  of  a  gross  fraud  upon  the 
public.  But  this  is  precisely  the  case  with  banks,  so  far  as  their  capi- 
tals are  made  up  of  stock  notes.  Yet  they  report  the  whole,  real  as 
well  as  fictitious,  as  so  much  capital  'actually  paid  in'.  Is  it  not 
palpable  that  all  the  discounts  and  loans  made  by  a  bank,  beyond  the 
amount  of  its  real  funds  kept  on  hand  to  answer  for  the  paper  it  thus 
issues,  are  loans  of  mere  paper,  not  representing  any  real  capital,  the 
bank  receiving  the  indorsed  notes  of  individuals,  on  interest,  for  its 
own  notes  without  interest?"  "It  is  said  that  the  public  loses  noth- 
ing by  this  gain  to  a  bank,  since  the  paper  passes  and  serves  as  money. 
The  same  might  be  said  if  a  bank  loaned  its  paper  without  any  capital 
at  all;  the  same  might  be  said,  if  oak  leaves,  instead  of  paper,  were 
used  as  a  currency.  That  by  far  too  great  a  portion  of  the  capitals  of 
the  banks  already  granted  consists  of  nothing  better  than  such  notes, 


34  Chartered  Banking  in  Rhode  Island. 

is  to  be  inferred  from  their  reports,  by  which  it  appears  that  nearly  a 
million  and  a  half  of  dollars  is  due  to  them  from  their  stockholders. 
It  is  thus  that  the  law  pledging  their  stock  for  the  debts  due  from 
stockholders  to  their  banks  is  grossly  abused ' '.  A  comparison  between 
the  Providence  Bank,  organized  on  a  specie  basis  when  banks  were 
trustees  of  the  community's  interests,  the  Bristol  Bank,  organized 
when  stock  notes  were  not  very  common,  and  the  Mount  Hope  Bank, 
organized  when  stock  notes  were  the  whole  capital,  will  illustrate  the 
development  of  this  custom.     The  figures  are  from  the  report  of  1821 : 


Date  of 
Charter 

Capital 

Directors 

— Loans  to — 
Stockholders 

All  others 

Providence    Bank     1791 

$422,000 

$10,300 

$40,400 

$349,300 

Bristol   Bank 1800 

120,000 

57,400 

32,700 

46,000 

Mt.   Hope 1818 

75,000 

72,200 

9,800 

The  Bristol  banks,  thus  precariously  organized  on  paper,  had  an 
unhappy  and  inglorious  experience  when,  in  1826,  the  tax  on  the  ' '  paid 
up ' '  capital  of  all  banks  was  increased  from  5  to  12  1-2  cents  per  $100. 
Five  of  them, the  Eagle, the  Freeman's,  the  Union,  the  Commercial  and 
the  Bristol,  petitioned  for  relief  from  taxes  on  the  ground  that  their 
capital  had  been  "impaired"  by  "losses".  The  first  three  noted  had 
been  chartered  in  1817  and  1818.  The  Eagle,  chartered  with  $200,000 
capital,  had  commenced  business  with  $100,000,  and  in  1826  reduced  it 
to  $50,000.1 

Another  objection  to  the  increase  of  capital  was  the  political  influ- 
ence which  it  might  wield.  "Some  of  the  banks,"  said  Hazard, 
"already  deny  and  threaten  to  resist,  the  authority  of  the 
legislature  to  regulate  or  tax  them.  They  consider  themselves 
as  so  many  privileged  and  unaccountable  corporations.  And 
if  we  reflect  upon  the  powers  which  have  been  granted  to 
them,  the  amount  of  debts  due  them,  the  number  and  de- 
scription of  their  debtors,  and  the  influence  they  derive  from 
that  source,  and  especially,  if  we  consider  the  numbers  interested  in 
those  corporations  throughout  the  state,  and  even  in  this  general  as- 
sembly—we shall  not  feel  disposed  to  make  light  of  their  pretensions". 
The  efl'ects  of  such  political  influences  had  already  been  felt  in  the 
liberal  provisions  of  the  charters  and  the  absence  of  effective  legis- 
lative control.  Mr.  Hazard  claimed  that  the  clauses  of  the  laws  relat- 
ing to  the  issues  of  circulation  and  the  amount  of  loans  had  no  real 
restraining  force.  A  bank  could  first  loan  its  whole  capital ;  it  could 
issue  notes  for  as  much  more  and  loan  them ;  it  could  further  make 
loans  for  the  amount  of  its  deposits;  if  discounts  were  left. on  deposit 

'American,  June,  1826.  Reference  to  the  table  at  the  end  of  the  chapter 
will  show  the  increase  in  obligations  of  directors  and  stockholders  and  the 
amounts  loaned  on  bank  stock  immediately  after  a  large  number  of  charters 
had  been  issued. 


Chartered  Banking  in  Rhode  Island.  35 

it  could  make  loans  with  them.  The  fact  here  criticised  may  be  put 
more  briefly  in  the  statement  that  the  laws  provided  for  no  reserves 
whatever.  As  to  the  indiscriminate  extension  of  such  powers  he  said : 
"The  early  banks  w-ere  instituted  by  capitalists.  Since  that  time 
those  who  have  sought  after  banks  have  generally  been  those  who 
themselves  were  in  want  of  capital".  "It  is  probable  that  out  of  a 
multitude  of  bank  managers  there  will  be  some  unfit  for  such  a  trust. ' ' 

It  was  reasoned  by  the  advocates  of  the  charters  that  the  granting 
of  them  would  stimulate  business  and  thus  increase  capital.  Hazard 
replied,  ' '  The  doctrine  that  a  definite  amount  of  money  is  required  for 
the  purpose  of  business  applies  to  the  amount  in  value,  not  in  quan- 
tity"; that  capital  could  only  increase  in  natural  ways;  that  the 
amount  of  specie  in  the  community  was  determined  by  the  business  of 
the  community  in  its  relation  to  other  communities,  and  not  at  all  by 
the  banking  capital ;  that  to  increase  the  banking  capital  would  simply 
divide  the  existing  real  money  (specie)  among  a  greater  number  of 
banks,  unless  the  excessive  issues  of  bills  made  redemptions  impossible, 
reduced  the  state  to  a  paper  standard  and  drove  all  real  money  from 
its  borders. 

But  the  evils  which  had  resulted  from  the  scramble  for  the  flesh  pots 
of  fictitious  banking  fell  hardest  upon  the  members  of  the  community 
who  thus  apparently  had  the  means  of  easy  borrowing  brought  to  their 
doorsteps  and  under  the  speculative  frenzy  of  the  day  fell  victims  to 
their  seeming  benefactors.  This  fact  was  due  both  to  the  inflation 
theory  of  banking  and  to  the  abuse  of  the  bank  process  power.  It  was 
regretted  by  all,  even  by  the  banks  themselves,  that  the  power  was 
ever  originated.  Its  severe  pressure  upon  individuals  was  the  least 
of  its  ills.  Mr.  Hazard,  with  a  leaning  toward  rhetorical  effect  rather 
than  conservative  statement,  thus  describes  its  effects.  It  drew,  said 
he,  ' '  into  the  banks  all  the  property  of  insolvent  debtors,  to  the  exclu- 
sion, nearly,  of  all  individual  creditors".  It  led  "banks  to  extend 
their  loans  to  many"  whose  ruin  was  "the  inevitable  consequence". 
Between  1816  and  1826  the  debts  due  to  the  banks  had  increased  from 
$2,500,000  to  $6,970,000.  ' '  We  cannot  tell  what  portion  of  the  ratable 
property  is  owned  by  stockholders,  or  members  of  the  banking  com- 
panies ;  but  we  know  that  nearly  all  the  wealthy  men  in  the  State  are 
large  stockholders;  and  if  we  w-ere  to  deduct,  from  the  general  esti- 
mate, their  portions  of  the  ratable  property  in  the  state,  and  from  the 
amount  of  debts  due  to  the  banks,  such  part  as  is  due  from  stockhold- 
ers, the  result  would  present  us  with  a  frightful  account  of  the  situa- 
tion of  those  who  own  the  residue  of  the  ratable  property  and  owe  the 
rest  of  the  debts  to  the  banks". 

This  able  argument  had  only  a  temporary  effect.  In  1827  the  legis- 
lative mill  began  to  grind  again,  and  though  the  product  was  only  one 


36  Chartered  Banking  in  Rhode  Island. 

charter  in  that  year,  by  1837  twenty-two  charters  had  been  granted  for 
capital  of  $2,625,000,  and  authority  to  increase  to  $6,850,000.  Since 
1791  the  state  had  chartered  sixty-eight  banks  with  initial  capital  of 
$4,610,000,  and  authorized  capital  of  $11,400,000.  Six  had  ceased 
business,  leaving  sixty-two,  with  nominal  paid  up  capital  of  $9,837,200. 

The  excessive  capital  stock  of  Rhode  Island  finds  some  explanation 
in  the  abuses  just  noted.  The  truth  is  that  the  banks  here,  as  in  Massa- 
chusetts and  elsewhere,  had  no  such  an  amount  of  capital  permanently 
paid  in  as  the  reports  would  indicate.  The  Second  Bank  of  the  United 
States,  with  an  assumed  capital  of  $35,000,000,  was  known  to  have 
started  in  business  with  not  over  $5,000,000  in  real  money.  The  stock 
jobbing  countenanced  by  it  was  universal  at  the  time.  Between  1800 
and  1860  it  is  doubtful  if  more  than  one-third,  and  perhaps  not  one- 
fifth,  of  the  nominal  capital  of  the  banks  in  Rhode  Island  was  paid 
for  in  any  other  way  than  by  stock  notes.  Such  real  working  capital 
as  the  banks  had  was  composed  of  deposits  and  specie  and  other  accu- 
mulated earnings.  The  last  item  alone,  owing  to  the  enormous  earnings 
and  small  losses,  would  account  for  nearly  the  whole  of  the  existing 
bank  capital  at  any  given  period. 

During  all  this  period  the  total  amount  of  specie  held  by  the  banks 
in  the  state  had  at  no  time  exceeded  $660,000,  and  had  not  averaged 
above  $350,000.  This  amount  of  metallic  stock  had  done  duty,  if  we 
may  credit  the  reports,  in  paying  the  specie  installments  of  bank  capi- 
tal of  over  $21,000,000. 

The  close  association  of  the  manufacturing  and  banking  interests 
subjected  banks  to  severe  strains  at  times,  but  their  limited  demand 
liabilities  in  the  form  of  circulation  and  deposits  were  elements  of 
strength,  especially  as  the  deposits  were  largely  made  up  of  discounts, 
and  in  so  far  were  a  part  of  the  banks'  contingent  assets.  The  crisis 
of  1829  was  marked  by  the  failure  of  some  of  the  state  s  leading  man- 
ufacturers; among  them  were  the  Wilkinsons  of  Pawtucket,  whose 
family  and  business  associations  with  the  Slaters  had  been  instru- 
mental in  bringing  the  cotton  industry  to  its  then  condition  of  perfec- 
tion and  acknowledged  supremacy.  The  Farmers  and  Mechanics  Bank 
of  Pawtucket  was  involved  in  the  disaster.  An  examination  of  it  in 
October,  1829,  showed  that,  with  capital  of  $200,000,  deposits  of 
$14,700,  and  circulation  of  $16,900,  it  had  loaned  $326,500.  Its  total 
quick  assets  consisted  of  $1,800,  deposited  in  other  banks,  $186  of  over- 
drafts, and  $22.03  in  cash.  In  order  to  make  loans  to  carry  its  cus- 
tomers it  had  borrowed  $93,556  from  banks,  and  when  its  credit  was 
exhausted,  had  placed  in  the  hands  of  a  third  party  for  negotiation  for 
its  benefit  $4,000  cashier's  checks.  It  had  furthered  the  interests  of 
its  customers  by  endorsing  and  negotiating  $45,000  of  their  paper. 
Driven  to  extremes,  its  cashier  had  endorsed  $22,000  of  the  Wilkin- 


Chartered  Banking  in  Rhode  Island.  37 

sons'  paper  "under  circumstances  which,  he  did  not  conceive,  rendered 
the  bank  liable".  It  thus  had  liabilities  of  $399,400  and  assets  above 
noted,  plus  its  loans  and  discounts;  and  of  these  the  examiners  re- 
ported ' '  tliat  nearly  every  one  of  its  debtors  had  failed  and  put  their 
property  in  the  hands  of  assignees".^  Enough  was  saved  from  the 
wreck  to  pay  its  creditors,  except  the  stockholders,  and  in  1835  it  was 
reorganized.  From  its  ashes,  with  its  name  appropriately  changed  to 
the  Phenix  Bank  of  Providence,  rose  an  institution  which  still  main- 
tains a  prosperous  existence.^ 

The  banks  did  not  altogether  escape  the  inflation  tendencies  of  the 
early  30  's,  as  is  shown  by  the  rapid  increase  in  their  circulation  from 
$929,500  in  1830  to  $1,864,100  in  1837.  Pending  the  final  decision  by 
the  supreme  court  of  the  United  States  as  to  the  constitutionality  of 
the  issue  of  circulating  notes  by  banks  incorporated  by  the  states,  the 
charter  of  the  Globe  Bank,  issued  in  1833,  was  the  fii-st  to  contain  a 
specific  grant  of  the  power  to  issue  "bills  of  credit".^  And  although 
the  United  States  court  decided  that  the  note  issues  of  state  banks  were 
not  bills  of  credit,  local  charters  continued  to  class  them  as  such  and 
to  confer  the  power  to  issue  them. 

Despite  this  apparent  association  of  the  banks  with  the  inflation 
movement,  the  real  origin  of  many  of  them  can  be  traced  to  the  cor- 
porate influences  of  the  times.  The  Blackstone  Canal  was  not  a  finan- 
cial success.  In  1831  the  Blackstone  Canal  Bank  was  chartered  and 
authorized  to  invest  $150,000  of  its  funds  in  the  stock  of  the  canal 
company.  The  New  York  and  Stonington  Railroad  was  chartered  in 
1832,  and  the  Globe  Bank,  despite  its  hitherto  unique  clause  as  to  bills 
of  credit,  was  chartered  in  the  next  year,  partly  as  its  fiscal  agent.  Its 
large  issues  of  circulating  notes,  which  exceeded  those  of  any  other 
bank  at  the  time,  reaching,  in  1835,  $97,953,  are  explained  by  the  pay 
roll  needs  of  that  and  other  corporations. 

The  business  disturbances  which  arose  in  connection  with  Jackson's 
controversy  with  the  United  States  Bank  were  keenly  felt  in  Rhode 
Island,  because  the  success  of  its  industries  was  so  dependent  on  exten- 
sive credit.  In  the  latter  part  of  1833  Secretary  Taney  made  an  agree- 
ment with  the  Arcade  Bank  of  Providence  to  receive  all  the  United 

'Report,  Oct.,  1829. 

^It  is  not  a  little  singular  that  the  Albion  Company  and  the  Valley  Falls 
Company,  both  of  which  were  involved  in  the  failure  of  the  Wilkinsons  and 
of  the  Farmers  and  Mechanics  Bank  in  1829,  were,  in  1900,  under  the  control 
of  Jonathan  and  James  H.  Chace,  the  former  of  whom  was  also  president  of 
the  Phenix  Bank. 

*The  case  of  Briscoe  vs.  Bank  of  Commonwealth  of  Kentucky,  first  tried  in 
1832,  was  decided  by  Jackson's  packed  supreme  court  in  January,  1837.  The 
note  issues  of  banks  were  declared  not  to  be  bills  of  credit  within  the  mean- 
ing of  the  constitution  of  United  States.      11  Peters,  257. 


38  Chartered  Banking  in  Rhode  Island. 

States  deposits.  It  was  to  accept  at  par  all  the  notes  of  neighboring 
banks  which  were  specie  paying,  transfer  the  deposits  to  any  other 
part  of  the  country  on  demand  and  without  charge,  and  ' '  perform  all 
of  the  services  rendered  by  the  United  States  Bank".  Whenever  the 
treasurer  requested,  or  whenever  its  deposits  exceeded  50  per  cent,  of 
its  paid  up  capital,  without  his  request,  it  was  to  furnish  collateral 
security  suitable  to  him,  to  cover  such  excess  deposit.^  This  business 
was  profitable,  for  the  accumulating  receipts  of  the  government  left 
large  balances  in  the  banks.  In  November,  1836,  the  Arcade  Bank, 
with  $400,000  capital  and  only  $32,000  general  deposits,  had  $269,000 
of  the  United  States  funds,  and  the  Rhode  Island  Union  Bank  of  New- 
port had  $150,000  of  like  deposits,  although  its  individual  deposits 
were  only  $16,000.  The  banks  in  Rhode  Island  did  not,  as  was  else- 
where the  case,  use  these  deposits  as  a  basis  of  circulation. 

The  United  States  Bank,  in  October,  1833,  had  a  nominal  local  capi- 
tal of  $800,000  and  local  loans  and  discounts  of  $591,700.  When  Jack- 
son began  to  remove  the  United  States  deposits  from  it,  the  bank  began 
as  a  counter  stroke  a  sharp  contraction  of  its  loans.  In  January,  1836, 
they  had  been  reduced  to  $2,200,  but  the  Providence  Bank  had  stepped 
into  the  breach  and  bought  $474,000  of  them.^  This  interesting  period 
of  about  two  years  is  rich  in  protests  sent  by  the  leaders  in  local  poli- 
tics and  industry  to  congress.  A  memorial  from  Providence,  early  in 
1834,  with  1,143  signatures,  recited  that  "within  a  short  period  of  four 
months  we  have  rapidly  passed  from  a  state  of  measurable  comfort  and 
security  to  one  of  general  distress.  A  panic  pervades  every  portion  of 
the  country.  Present  distrust  and  a  foreboding  of  the  future  unnerve 
and  discourage  our  most  enterprising  citizens".  They  complained  of 
a  stagnation  of  business  in  all  forms  and  a  universal  decline  in  value 
of  all  descriptions  of  property. 

One  month  previous  money  had  been  abundant  at  6  per  cent.,  but  in- 
creased pressure  had  driven  in  the  circulation  of  banks  and  withdrawn 
their  accustomed  deposits,  and  they  had  taken  from  them  their  means 
of  granting  accommodation  by  discounts  of  notes  and  bills  of  ex- 
change. Hence  "the  rate  of  interest  has  advanced  to  9,  12,  and  18 
per  cent.  It  is  now  difficult,  nay,  almost  impossible,  to  negotiate 
domestic  exchange  or  to  obtain  money  on  the  best  mercantile  paper". 
Providence  county  men,  3,500  in  number,  protested  against  the  "ex- 
periments" which  had  been  made  with  the  currency.  There  were  also 
some  documents  endorsing  Jackson.     Nearly  8,900  signatures  of  men 

^Similar  arrangements  were  subsequently  made  with  the  Bristol  Bank  of 
Bristol  and  the  Newport  Bank  of  Newport.  When  by  act  of  June  23,  1836, 
the  deposits  in  United  States  depositories  were  limited  to  three-fourths  of 
their  capital,  the  Rhode  Island  Union  of  Newport  was  added  to  the  list. 

••'Report,  1836. 


Chartered  Banking  in  Rhode  Island.  39 

condemning  the  President's  action  were  forwarded  to  congress,  while 
his  supporters  mustered  fewer  than  1,800.^ 

How  much  of  the  complaint  was  real  and  how  much  was  political 
may  be  gleaned  by  comparing  the  statements  of  stringency  and  con- 
traction, caused  by  Jackson's  attitude,  with  the  facts  that  in  Rhode 
Island,  from  October,  1833,  to  Qctober,  1835,  banking  capital  in- 
creased over  $1,300,000,  circulation  increased  $380,000,  deposits  in- 
creased $240,000,  specie  reserves  increased  $163,000,  and  loans  in- 
creased about  $1,900,000.  The  local  contraction  of  the  United  States 
Bank  was  more  than  offset  by  the  local  expansion  of  state  banks. 

When  by  the  suspension  of  specie  payments  in  1837  the  banks  ceased 
de  facto  to  be  United  States  depositories,  the  Rhode  Island  Union  paid 
to  the  government  $38,586.39— the  whole  of  its  public  deposits;  the 
Arcade  paid  $93,999.58— all  but  $10  of  its  public  deposits."  In  June, 
1836,  was  passed  the  act  by  which  about  $30,000,000  of  the  United 
States  surplus  was  distributed  among  the  states.  The  portion  of 
Rhode  Island  was  $386,611,  and  it  was  at  first  loaned  to  the  banks  by 
the  state  at  five  per  cent,  interest.  It  was  distributed  among  forty- 
nine  of  the  strongest  institutions,  seemingly  according  to  the  amount 
of  their  paid  up  capital. 

The  receipt  by  the  state  of  this  money  was  particularly  agreeable, 
because  it  was  largely  the  proceeds  of  sales  of  public  lands.  Her  rep- 
resentative, David  Howell,  had  argued  strongly  during  the  debates  on 
the  grant  of  an  impost  to  the  continental  congress,  that  the  Revolution- 
ary debts  should  be  paid  for  by  the  sales  of  the  western  lands.  Thus 
after  over  fifty  years  it  almost  seemed  that  his  claim  had  been  ac- 
quiesced in.  The  state,  therefore,  in  January,  1837,  directed  its 
senators  to  favor  expunging  the  resolution  of  the  United  States  senate 
condemning  Jackson 's  action  with  regard  to  the  public  revenues ;  but 
the  assembly  took  occasion  to  say  that  in  so  directing  its  senators  it  was 
"desirous  of  maintaining  and  reasserting  the  right  to  instruct  the  sen- 
ators of  this  state  in  the  senate  of  the  United  States". 

In  1836,  as  the  result  of  an  investigation  into  the  methods  of  bank- 
ing, with  special  reference  to  the  rates  of  interest,  was  passed  a  re- 
markable supervisory  and  restrictive  law.  The  stringent  recommend- 
ations of  the  committee  of  1826  had  failed  of  passage.  Meanwhile, 
however,  in  one  or  two  charters  some  important  clauses  had  been  in- 
serted. The  charter  of  the  Farmer's  and  Manufacturer's  Bank  of 
1827,  besides  providing  for  a  stockholder's  liability  similar  to  that  of 
the  Union  Bank,  was  by  its  terms  subject  to  "all  general  acts  applying 
to  banks  and  to  any  acts  in  amendment  of  or  repeal  thereof,  or  in  any 
way  affecting  the  same".     The  charter  of  the  High  Street  Bank  con- 

'Executive  Docs.  U.  S.  1833-34. 

''Executive  Documents  United  States,  1837-1838  passim. 


40  Chartered  Banking  in  Rhode  Island. 

tained  the  same  provision.  These  clauses  were  the  result  of  a  contest 
over  the  right  of  the  state  to  tax  the  banks,  a  right  which  was  con- 
firmed to  it  by  the  United  States  Supreme  Court.^  The  charter  of  the 
West  Greenwich  Farmers  Bank  (1833)  was  the  first  to  provide  the 
unlimited  personal  liability  of  stockholders.  Nearly  all  subsequent 
charters  contained  this  provision,  as  well  as  the  specific  clause  subject- 
ing them  to  such  taxes  as  the  state  might  impose. 

The  committee  of  investigation  in  1836  then  had  found  itself  sup- 
ported by  a  strong  undercurrent  of  sentiment  unfavorable  to  banks, 
because  of  their  resistance  to  taxes,  and  a  legislature  disposed  to  insist 
on  curtailing  their  special  privileges  and  immunities.  The  notion  was 
still  current  that  the  chief  function  of  banks  was  local  accommoda- 
tions. Capital  was  not  then  mobile,  as  it  now  is,  and  the  practice  of 
the  Mt.  Vernon  Bank  of  Foster  and  the  Smithfield  Lime  Rock  Bank  in 
loaning  a  very  large  portion  of  their  assets  to  Providence  was  thought 
to  be  an  injustice  to  the  respective  towns  in  which  they  were  situated ; 
while  the  practice  of  the  Newport  Exchange  Bank  in  loaning  one-half 
its  funds  in  New  York  subjected  it  to  severe  censure.  The  legal  rate 
of  interest  had  been  fixed  at  6  per  cent,  during  the  Revolutionary 
period.  It  had  been  openly  violated  by  all  since  the  period  of  the 
second  war  with  Great  Britain  and  even  before,  a  practice  the  pre- 
vention of  which  had  been  one  of  the  objects  of  the  establishment  of 
the  first  banks,^  and  now  became  an  object  of  public  thought.  Besides 
the  wild  speculative  tendencies  of  the  period  and  the  desire  to  get  rich 
easily  by  borrowing  money  at  low  rates  on  western  prairie  lands  at 
house  lot  valuations,  the  Jacksonian  democracy,  which  had  perhaps  as 
little  common  business  sense  as  any  wave  of  political  sentiment  that 
has  possessed  the  country,  expressed  itself  here  in  an  outcry  against 
usury.  It  is  significant  that  two  of  the  members  of  the  committee  on 
banking  in  1836  were  S.  Y.  Atwell  and  T.  W.  Dorr,  the  one  a  follower 
in,  the  other  a  leader  of,  the  forces  against  the  privileges  of  capitalism 
and  property  in  Rhode  Island.  It  was  characteristic,  both  of  them 
and  of  the  period,  that  they  should  fail  to  distinguish  between  that 
proper  degree  of  supervision  of  banking,  which  would  protect  the 
interests  of  the  innocent  from  fraud,  and  that  supervision  which  un- 
warrantably interferes  with  the  conscious  and  voluntary  relations 
between  banks  and  individuals  and  in  which  they  alone  are  affected. 
With  regard  to  the  question  of  visury,  which  was  the  chief  subject  of 
the  investigation,  the  committee  acknowledged  that  no  word  of  com- 
plaint had  been  made  to  them,  either  by  the  banks  or  their  customers, 
nor  had  they  sought  any  corrective  legislation.  Indeed,  higher  rates 
of  interest  and  exchange  had  been  willingly  offered  than  the  banks  had 

^Providence  Bank  vs.  Billings  &  Pitman,  4  Peters,  515. 
"The  charter  of  the  Providence  Bank  contained  the  following:    "By  discount 
rendering  easy  and  expeditious  the  anticipation  of  funds  on  legal  interest". 


Chartered  Banking  in  Rhode  Island.  41 

charged.  The  significance  of  these  facts  seems  to  have  been  entirely 
unnoticed.  As  might  have  been  expected,  the  report  in  some  respects 
lacked  judicial  moderation.  The  commercial  banking  interest  had 
hitherto  been  inactive  in  politics.^  It  possessed  about  one-sixth  of  the 
entire  wealth  of  the  state.  It  soon  became  an  activd  participant  in 
political  doings.  Its  power  will  be  noted  in  the  less  stringent  laws 
which  soon  were  enacted. 

The  report  first  indicated  the  unreliable  nature  of  bank  returns 
which  were  made  on  a  fixed  day  in  each  j^ear.  In  preparation  for 
their  return  the  banks  had  annually  curtailed  their  loans,  thus  causing 
a  forced  stringency  in  the  local  money  market.  The  official  return  of 
October,  1835,  and  the  statement  collated  by  the  committee  at  visits 
unexpected  to  the  banks,  showed  as  follows : 

Official  Return.  At  Visitation. 

Deposits   $1,472,600  $1,812,600 

Due  banks  and  others 179,800  •                  586,700 

Circulation   1,160,800  1,294,300 

Total  demand  liabilities $2,813,200  $3,693,600 

Increase   880,400 

Specie 486,600  197,500 

Bank  notes 319,900  322,200 

Due  from  banks 180,100  219,200 

Total  quick  assets 986,600    .  738,900 

Decrease $    247,700 

Total  difference $1,128,100 

The  proportion  of  quick  assets  to  demand  liabilities  had  declined 
from  over  one-third  at  the  time  of  the  official  returns  to  one-fifth  at 
the  time  of  the  unexpected  visitation. 

The  devices  which  had  been  adopted  by  the  banks  to  get  more  than 
the  legal  rates  of  interest  had  been  almost  universal,  among  Providence 
banks  the  single  exception  being  the  Manufacturers  Bank.  They 
sometimes  favored  their  own  customers,  but  usually  the  rates  varied 
with  "the  avarice  of  the  lender"  and  "the  necessity  of  the  borrower". 
The  custom  had  its  undoubted  origin  in  the  cost  of  collection  of  drafts, 
which,  in  this  manufacturing  center,  constituted  a  large  portion  of  the 
discounts.     Rates  of  exchange  on  them  were  normally  one-fourth  per 

^It  is  not  clear  that  they  took  any  part  in  the  contest  in  1831  between 
James  Fenner  and  Lemuel  H.  Arnold  for  the  governorship.  The  latter,  the 
candidate  of  the  Jacksonian  democracy,  was  charged  by  his  opponents  with 
intending  to  abolish  the  bank  tax  and  impose  all  taxes  on  land.  To  a  voting 
clientage  composed  of  freeholders  who  had  not  paid  any  taxes  since  1824 
such  a  proposition  was  a  veritable  bombshell.  Arnold  denied  the  charge,  and 
a  spirited  correspondence  was  indulged  in  between  the  rival  candidates.  Ar- 
nold was  successful  in  the  election. 


42  Chartered  Banking  in  Rhode  Island. 

cent,  on  Boston  and  New  York,  rising  to  two  per  cent,  on  the  west  and 
south.  The  banks  charged  from  one  to  two  per  cent,  on  four  months' 
acceptances  on  New  York  in  addition  to  the  rate  of  interest.  The  total 
rate  of  interest,  therefore,  varied  from  nine  to  twelve  per  cent. 

In  discounting  notes  the  most  ingenious  methods  were  adopted. 
Discounting  was  done  in  various  ways.  The  borrower  sometimes  dated 
his  note  back  thirty  days  and  discount  was  calculated  from  the  date  of 
the  note ;  at  times  he  would  agree  to  leave  the  proceeds  on  deposit  for 
thirty  days ;  sometimes  he  was  paid  by  a  check  drawn  on  some  other 
town  and  exchange  was  charged  on  the  check ;  sometimes  he  received 
the  proceeds  of  his  discount  in  current  money  at  par,  and  when  he 
passed  it  back  over  the  counter  for  deposit  it  was  received  at  one- 
quarter  per  cent,  to  one-half  per  cent,  discount.  Perhaps  the  most 
common  device  was  to  make  a  note  payable  at  some  other  bank.  It 
then  became  a  draft  and  exchange  was  charged  on  it.  When  by  the 
law  enacted  at  this  time  exchange  was  declared  illegal  on  notes  payable 
in  the  same  town,  a  bank  in  the  suburbs  was  selected  and  notes  were 
made  payable  there.  The  Elmwood  Bank  of  Cranston  was  used  in 
this  way  for  a  decade  before  the  Rebellion.  It  was  the  daily  custom  of 
•the  cashier  of  this  bank  to  come  down  town  and  remain  in  the  office  of 
the  notary  for  an  hour  each  afternoon,  in  order  that  notes  payable  at 
his  bank  ' '  out  of  town ' '  could  be  presented  conveniently. 

The  law  passed  in  June,  1836,  provided  that  no  bank  should  begin 
business  until  fifty  per  cent,  of  its  capital  had  been  actually  paid  in 
and  such  payment  certified  to  by  the  bank  commissioners.  Its  whole 
capital  must  be  paid  in  within  one  year. 

The  capital  stock  of  a  bank  could  not  be  reduced  by  division  without 
permission  of  the  general  assembly ;  if  it  became  impaired  to  the  extent 
of  one-fourth  part,  the  deficiency  must  be  made  good  within  one  year. 

Interest  above  six  per  cent,  was  forbidden,  and  exchange  above  one- 
fourth  per  cent,  for  New  England  and  New  York  city,  and  increasing 
to  two  per  cent,  in  places  south  of  South  Carolina  and  west  of  Ohio, 
was  also  prohibited. 

No  bank  could  be  moved  and  no  branch  established. 

Violations  of  any  of  the  above  provisions  worked  forfeiture  of  the 
charter,  and  a  violation  of  the  interest  laws  was  also  punishable  with 
a  fine  of  $500  for  each  offense. 

No  one  could  be  a  director  unless  he  was  a  citizen  and  resident  of 
the  state. 

No  bank  could  be  chartered  with  less  than  $50,000  capital  and  every 
bank  must  be  incorporated  by  its  actual  stockholders.  The  subscrip- 
tions to  the, stock  were  to  be  supervised  by  the  bank  commissioners, 
they  giving  preference  to  the  residents  of  the  town  where  the  bank  was 
located. 


Chartered  Banking  in  Rhode  Island.  43 

Every  director,  president  and  cashier  was  required  to  take  oath  to 
observe  the  interest  laws  under  penalty  of  $1,000. 

The  bank  process  act  was  repealed  and  all  debts  were  recoverable 
by  the  usual  legal  methods. 

Banks  were  required  to  return  a  detailed  account  of  their  condition 
on  request  of  the  bank  commissioners,  and  if  they  delayed  for  thirty 
days  their  charter  was  forfeited. 

Three  commissioners  were  to  be  elected  by  the  general  assembly,  who 
had  power  to  summon  officers  under  oath,  and  to  visit  and  examine 
banks,  and  in  general  they  were  clothed  with  the  "visitatorial  power  of 
the  general  assembly"  to  ascertain  the  state  and  condition  of  banks. 
If  "in  their  opinion"  any  bank  had  forfeited  its  charter  or  was  "so 
managing  its  concerns  that  the  public  are  in  danger  of  being  defraud- 
ed thereby",  they  could  complain  to  the  supreme  court,  and  the  latter 
must  forthwith  issue  citation  to  the  bank  officers  to  show  cause  why 
injunction  should  not  issue  against  them. 

In  the  same  year,  although  the  tax  on  the  increase  of  capital,  which 
had  been  fixed  at  two  and  one-half  per  cent,  in  1831  was  reduced  to 
two  per  cent,  and  the  bonus  imposed  in  1831  was  removed,  the  annual 
tax  on  capital  stock  was  increased  from  twelve  and  one-half  cents  to 
cwenty-five  cents  per  $100. 

Many  officers  of  the  banks  failed  to  take  the  oath  required  in  regard 
to  bank  interest,  and  in  October  the  state  treasurer  was  authorized  to 
enforce  the  penalty.  In  January,  1837,  directors  were  prohibited 
from  serving  on  more  than  one  board,  and  one-third  of  the  stockholders 
were  authorized  to  call  a  stockholders'  meeting. 

The  members  of  the  investigating  committee  of  1836  were  elected 
bank  commissioners  and  zealously  entered  upon  their  duties.  They 
reported  to  the  legislature  in  January,  1837,  the  results  of  their  in- 
quiries. It  appeared  that  directors  had  already  begun  to  evade  the 
law  by  borrowing  money  of  their  banks  and  loaning  it  at  higher  than 
the  lawful  rates  of  interest.  The  directors  of  the  Merchants  Bank 
were  the  most  conspicuous  offenders  against  the  spirit  of  the  law.  In 
discussing  the  proportion  of  the  loans  made  to  directors  and  others, 
they  said  that  it  was  originally  intended  that  the  public  should  have 
the  benefit  of  banking  institutions.  "How  much  of  the  blame  that 
belongs  to  an  almost  uniform  departure  from  the  original  design  of 
banks  in  this  respect  is  justly  attributable  to  those  who  govern  them, 
and  how  much  to  circumstances  that  the  directors  cannot  well  control, 
it  is  difficult  to  decide."        ^ 

A  director  could  rarely  obtain  accommodations  elsewhere  than  at 
his  own  bank,  and  must,  therefore,  depend  on  it.  "If  his  wants  are 
large,  there  will  be  little  left  for  others  outside  the  board".  "And  so 
in  many  instances  banks  have  become. to  a  considerable  extent  mere 


44  Chartered  Banking  in  Rhode  Island. 

engines  to  supply  the  directors  with  money".  At  two  of  the  banks 
visited  one-half  of  the  discounts,  and  at  another  three-fifths  of  the 
discounts,  were  for  the  accommodation  of  the  directors  and  co-partner- 
ships of  which  they  were  members. 

Such  abuses  could  not  be  reached  by  laAv  and  nothing  was  done  in 
regard  to  them,  but  from  this  time  we  can  trace,  side  by  side  with 
the  relations  of  banks  to  corporations,  the  development  of  the  bank  as 
a  personal  machine. 

In  June  of  the  same  year  bank  officers  were  required  to  allow  stock- 
holders access  to  the  account  books  on  penalty  of  $50  (this  did  not 
3pply  to  individual  accounts),  and  at  the  same  time  the  consent  of 
three  directors  was  required  on  all  discounts. 

The  commissioners  found  many  unsound  institutions.  They  caught 
the  Scituate  Bank  in  the  very  act  of  fraud.^  They  entered  a  com- 
plaint against  a  number  of  other  banks  and  had  begun  legal  proceed- 
ings against  the  Rhode  Island  Central  Bank  of  East  Greenwich.  But 
in  October,  1837,  another  bank  act  was  passed.  It  was  partly  the 
result  of  the  zealous  activity  of  the  commissioners  in  performing  the 
duties  of  espionage  which  had  been  imposed  upon  them. 

It  provided  that  discounts  should  be  limited  to  the  amount  of  capital 
stock  paid  in  plus  the  deposits,  plus  the  amounts  due  from  banks  bear- 
ing interest  (i.  e.,  borrowing  of  other  banks  and  individuals),  plus  an 
amount  determined  by  a  percentage  on  their  capital  stock  graduated 
according  to  its  amount  from  80  per  cent,  for  banks  having  $50,000 
capital  to  30  per  cent,  for  banks  having  over  $400,000  capital. 

At  the  same  time  the  amount  of  circulation  was  restricted  to  certain 
percentages  of  the  amount  of  capital  as  follows : 

Capital  of  $50,000 

"       over  50,000  and  under 

120,000  and  under 

200,000  and  under 

300,000  and  under 

400,000  and  under 

Bill  holders  were  given  priority  of  claim  on  all  the  assets  of  the 
bank. 

The  most  important  clause  of  the  act  related  to  the  method  of  inter- 
pretation which  the  bank  commissioners  should  adopt  when  deciding 

^It  had  reported  in  October,  1835,  capital,  $15,660;  due  from  directors, 
$13,100;  circulation,  $334;  bills  of  other  basiks  $425,  and  specie  $10.  The 
commissioners  discovered  in  1836  that  it  had  been  sold  to  out-of-state  parties 
who  had  given  stock  notes  to  the  bank  for  $49,361,  while  it  held  stock  notes 
of  residents  for  only  $2,047.  Its  property  had  been  secretly  removed.  New 
plates  had  been  prepared  and  $43,000  of  bills  had  been  printed,  of  which 
$36,328  were  found  in  the  bank.  vA.fter  liquidation  the  name  of  the  bank  was 
changed  to  the  Hamilton  and  it  maintained  a  preca]:'ious  existence  until  1851. 


75  per  cent,  in  bills 

$120,00, 

65     "       "      "     " 

200,000, 

40     "       "      ''     " 

300,000, 

30     "       "      "     " 

400,000, 

25     "       "      "     " 

500,000, 

20     "       "      "     " 

Chartered  Banking  in  Rhode  Island.  45 

as  to  whether  the  acts  of  a  bank  endangered  public  interests,  and  so 
brought  it  within  the  scope  of  summary  injunction.  With  reference 
to  the  clauses  as  to  circulation  and  discounts,  it  was  provided  that  no 
bank  conforming  to  them  "should  be  declared  to  be  conducting  its 
business  in  such  a  way  that  the  public  was  likely  to  be  defrauded 
thereby  ".1 

The  commissioners,  in  May,  1838,  explained  that  they  had  with- 
drawn their  suit  against  the  R.  I.  Central  Bank  as,  under  the  above 
act,  violations  of  the  usury  laws  were  no  longer  an  actionable  offense. 
A  point  upon  which  they  did  not  lay  stress  was  that,  while  in  the  exer- 
cise of  their  functions,  they  had  included  the  stockholders  among 
those  whose  interests  they  were  to  serve ;  the  law  practically  excluded 
stockholders,  the  depositors  and  banks  and  individuals  of  whom  money 
had  been  borrowed." 

Whether  the  activity  of  Mr.  Dorr  and  the  ill-favor  with  which  his 
opinions  soon  came  to  be  viewed  was  the  cause  or  not,  he  did  not  long 
remain  a  member  of  the  commission,  and  in  the  midst  of  the  conserva- 
tive reaction  of  1842,  in  June,  the  bank  commissioners  act  was  re- 
pealed. Semi-annual  returns  of  banks  were  ordered  to  be  made  to  the 
general  assembly.  In  January,  1843,  the  secretary  of  state  was  au- 
thorized to  designate  the  day  on  which  returns  should  be  made. 

Rhode  Island  banks  suffered  but  little  comparatively  speaking  dur- 
ing the  depression  of  1837.  When,  owing  to  the  fall  in  the  price  of 
cotton,  the  southern  banks  suspended  specie  payments,  the  manufac- 
turers sustained  heavy  losses,  but  their  high  profits  for  the  few  pre- 
vious years  enabled  them  to  tide  over  the  period.  With  the  advice 
and  consent  of  the  bank  commissioners,  the  banks  suspended  on  May 
11— the  day  after  the  suspension  in  New  York.  Steps  were  at  once 
taken  to  protect  their  bill  holders.  The  banks  went  into  the  open 
market  and  bought  gold,  so  that  while  on  the  day  of  suspension  they 
hand  only  $268,800  of  specie,  one  month  later  they  had  $350,- 
000.  It  seems  at  first  to  have  been  their  policy  not  to  in- 
crease their  loans,  and  during  this  first  month  of  suspension 
less    than    $10,000    was    added    to    their    outstanding    lines.      In 

^"Unless  a  case  of  direct  and  intentional  fraud  should  be  suspected  or 
unless  the  bank  should  have  loaned  its  money  to  persons  suspected  of  being 
insolvent  to  such  an  amount  as  to  prevent  it  paying  its  liabilities  in  full,  or 
should  sell  its  specie  or  otherwise  dispose  of  it  than  for  the  redemption  of  its 
bills  at  par." 

-Anent  the  Bast  Greenwich  bank  it  may  be  noted  that  while  in  April,  1839, 
it  reported  capital  of  $136,600,  profits,  $9,900,  and  an  otherwise  sound  condi- 
tion; in  October  of  the  same  year  it  was  found  to  have  sustained  losses  de- 
stroying its  surplus  and  impairing  its  capital  to  the  extent  of  over  $54,000. 
The  assembly  allowed  it  to  continue  and  in  1854  it  disappeared  entirely. 


46  Chartered  Banking  in  Rhode  Island. 

May  the  general  assembly  authorized  them  to  issue  post  notes, 
running  for  one  year,  to  the  extent  of  one-fourth  their  cap- 
ital, and  it  was  hoped  that  this  would  relieve  the  demands  on  them. 
In  June,  however,  the  legislature  required  them  to  pay  five  per  cent, 
on  the  deposits  of  their  own  bills,  while  the  bank  commissioners  ad- 
vised that  they  receive  their  own  bills  from  each  other,  paying  interest 
on  their  debit  balances.  Their  deposits  on  interest  increased  from 
$320,700  to  $496,200  during  the  first  month  and  in  a  few  months  in- 
creased $300,000  more.  In  a  brief  period  their  obligations  to  banks 
also  increased  $213,000.  They  found  it  impossible  to  retain  their 
specie,  and  they  adopted  a  policy  of  leniency  with  their  debtors.  They 
began  to  increase  both  loans  and  circulation.  By  October  they  had 
•added  over  $400,000  to  their  circulation  and  over  $875,000  to  their 
loans  and  discounts.  At  the  same  time  they  fell  heavily  in  debt  to  the 
Suffolk  Bank  and  sent  over  $100,000  in  gold  to  Boston.  The  tide  then 
turned  and  within  six  months  they  had  nearly  doubled  their  specie, 
had  decreased  their  loans  by  about  $600,000,  and  although  they  had 
increased  their  circulation  $330,000,  they  were  in  as  good  a  position  as 
other  banks  to  resume.  Resumption  took  place  in  August,  1838.  The 
rate  of  interest  on  their  bills  deposited  with  them  in  excess  of  $1,000 
by  one  depositor  was  reduced  to  three  per  cent,  by  the  general  assem- 
bly in  October,  1837,  and  it  thus  became  possible  for  them  to  make 
profit  on  such  issues.  A  rapid  increase  of  over  fifty  per  cent,  in  cir- 
culation occurred  within  the  firs4  year  following  suspension.  It  is 
interesting  to  note  that  their  deposits  on  interest  between  May,  1837, 
and  May,  1838,  increased  $770,000,  almost  the  same  as  the  amount  of 
increase  in  circulation,  which  was  $755,000.  The  weekly  reports, 
which  the  commissioners  required  during  the  period  of  suspension, 
were  printed  in  the  public  press.  In  January,  1841,  Rhode  Island 
joined  other  states  in  a  memorial  against  the  sub-treasury  system 
and  in  favor  of  the  establishment  of  a  national  bank.^ 

Two  new  features  in  banking  marked  the  early  years  of  this  period. 
One  was  the  beginnings  of  the  accumulation  of  a  surplus  account  by 
the  banks  about  1815,  all  earnings  having  been  previously  paid  out  in 
dividends.  Another  was  the  establishment  of  the  first  savings  institu- 
tion, chartered  as  the  Savings  Bank  of  Newport  in  June,  1819. 

Its  object  was  ''to  provide  a  safe  and  profitable  mode  of  enabling 
industrious  persons  of  all  descriptions  to  invest  such  parts  of  their 
earnings  or  property  as  they  can  conveniently  spare".  Deposits  as  low 
as  $1  were  received,  but  interest  was  allowed  only  on  deposits  of  $5 
and  above.  Dividends  were  to  be  paid  semi-annually  at  the  rate  of 
five  per  cent.,  but  no  interest  was  to  be  allowed  on  sums  drawn  between 
dividend  periods.     All  surplus  earnings  were  to  be  divided  every  three 

'January  session,  1841,  pp.  66-67. 


Chartered  Banking  in  Rhode  Island.  47 

years  pro  rata  among  all  depositors  of  over  one  year's  standing. 
Money  could  be  drawn  only  after  a  notice  of  one  week  or  on  specified 
quarterly  days  in  January,  April,  July  and  October.  No  deposits 
were  received  from  corporate  bodies,  and  none  over  $100  from  an  indi- 
vidual at  any  one  time,  excepting  seamen 's  wages.  The  directors  could 
pay  otf  in  whole  or  in  part  the  deposit  of  any  individual  which 
amounted  to  $1,000.     The  total  deposits  could  not  exceed  $200,000. 

In  October  of  the  same  year  a  charter  was  granted  to  the  Providence 
Institution  for  Savings.  It  was  very  similar  in  its  provisions  to  that 
of  the  Newport  Bank,  but  the  earnings  were  to  be  divided  semi-annual- 
ly at  a  rate  to  be  determined  by  its  directors.  Its  limit  of  deposits  was 
$300,000.  The  restrictions  as  to  the  amount  of  deposits  have  been 
removed,  and  in  1879,  pending  resumption,  savings  banks  were  allowed 
to  require  ninety  days  notice  for  the  withdrawal  of  deposits.  The 
statistical  tables  at  the  end  of  the  chapter  indicate  the  importance  and 
number  of  savings  banks. 

THIRD   PERIOD— 1840-1865. 

The  period  1840-1865  contained  no  new  phases  of  banking.  There 
was  a  continuation  and  development  of  previous  methods.  Between 
June,  1836,  and  May,  1850,  only  two  banks  were  incorporated  and  the 
charter  of  one  of  them  was  repealed  before  it  went  into  operation.^ 
Meanwhile  both  the  amount  of  capital  and  the  amount  of  circulation 
increased  somewhat,  while  the  l(fans  and  discounts  increased  in  about 
the  same  degree.  The  noteworthy  feature  was  the  constantly  decreas- 
ing amounts  of  specie  held  in  proportion  to  the  circulation,  showing 
that  with  the  increasing  banking  capital  the  real  assets  of  the  banks, 
together  with  a  better  understanding  of  credits,  specie  ha4  ceased  to 
play  an  important  part  as  a  basis  of  circulation  and  had  become  merely 
a  reserve  for  it  or  rather  a  part  of  it.  The  amount  loaned  on  stock 
notes  as  well  as  overdue  paper  will  be  seen  in  the  tables  as  far  as  they 
were  reported. 

The  new  form  of  report  required  in  1843  set  forth  the  largest 
amount  due  from  any  one  borrower.  The  Providence  Bank  led  in  the 
list  with  $72,175  loaned  to  one  person.  The  "Washington  Bank,  which 
had  been  started  in  the  interests  of  the  farmers,  had  loaned  $25,226 
to  one  individual.  The  repeal  of  the  bank  commission  act  left  banks 
to  organize  themselves.  The  charter  of  the  People's  Bank  (1846), 
therefore,  provided  that  the  stockholders  should  not  be  allowed  to 
dispose  of  their  stock  until  the  whole  amount  of  it  had  been  paid  in. 
In  1849  bank  returns  were  required  only  annually,  and  though  the 

*The  North  Kingston  Exchange.  It  was  discovered  that  the  bank  with 
only  $50,000  capital,  and  that  not  paid  in,  had  already  to  issue  $42,200  hills 
and  the  cashier  had  signed  $26,800  more,  making  $69,000  in  all. 


48  Chartered  Banking  in  Rhode  Island. 

amount  of  bills  under  $5  was  to  be  Reported,  many  failed  to  comply 
with  the  provision. 

In  the  year  1850  there  was  renewed  activity  in  bank  charters,  and 
by  the  end  of  1856  forty-seven  had  been  granted  by  the  legislature. 
Four  of  them  did  not  become  operative.  The  capitals  of  these  banks 
varied  from  $50,000  to  $500,000.  The  charter  of  the  Bank  of  Com- 
merce (1851)  was  the  first  to  set  its  maximum  capital  at  $1,000,000. 
Seventeen  of  them,  with  capital  of  $3,050,000,  were  to  be  located  in 
Providence. 

The  period  was  everywhere  one  of  marked  industrial  development, 
but  in  Rhode  Island  its  particular  feature  was  an  extraordinary  cor- 
PQrate  activity.  The  population  of  the  state  increased  over  seventy 
per  cent,  between  1840  and  1860,  and  much  of  the  increase  consisted 
of  a  foreign  element,  unaccustomed  to  our  institutions  and  to  banking. 
Most  of  such  got  their  livelihood  in  the  factories,  and  large  amounts  of 
circulation  were  issued  for  the  pay  roll  purposes.  In  1854  of  the  cir- 
culation of  $5,000,000,  about  $1,500,000  was  of  denominations  under 
$5.  Very  few  of  the  banks  speculated  in  note  issues  by  sending  notes 
out  of  the  state.  The  worst  offenders  in  this  way  were  the  Arcade,  the 
Bank  of  the  Republic,  and  the  Mt.  Vernon  of  Providence,  the  Com- 
mercial of  East  Greenwich,  and  the  Farmers  of  Wickford.  But  while 
the  increased  circulation  herein  found  its  partial  explanation,  the  dis- 
counts, which  increased  from  $14,300,000  in  1850  to  $28,700,000  in 
1856,  illustrated  the  local  corporate  needs.  The  relation  of  the  banks 
and  the  newly  forming  corporations  was  in  some  respects  even  more 
marked  than  at  any  other  period.  A  limited  co-partnership  act  had 
been  passed  in  1837,  and  the  first  general  corporation  act  of  the  state 
bears  date  of  1847.  Seventeen  insurance  companies  secured  charters 
within  a  decade  immediately  following  the  corporation  act.  From  this 
time  date  the  Hartford,  Providence  and  Fishkill  Railroad  Company, 
the  Providence  and  Worcester  Railroad  Company,  the  Providence, 
Warren  and  Bristol  Railroad  Company,  and  the  Providence  and 
Springfield  Railroad  Railway  Company  (first  incorporated  as  Woon- 
asquatucket  Railroad  Co.).  In  manufacturing,  steam  power  was  sup- 
planting water  and  the  mills  all  over  the  state  were  enlarging.  Many 
of  them  were  changing  from  private  companies  to  corporations. 

Many  of  the  banks  were  organized  for  the  distinct  purpose  of  taking 
over  corporate  obligations.  Some  banks  themselves  became  stockhold- 
ers or  incorporators  of  other  corporations.  The  Blackstone  Canal, 
the  American  and  the  Phenix  banks  were  among  the  corporators  of 
the  What  Cheer  Company.  The  association  of  the  Merchants  Insur- 
ance Company  and  the  Bank  of  Commerce  has  already  been  noted. 
The  Spragues,  the  Knights,  the  Smiths,  the  largest  manufacturers  of 
the  state,  had  controlling  interests  in  a  number  of  the  banks.     Such  a 


Chartered  Banking  in  Rhode  Island.  49 

movement  had  its  excesses,  and  these  were  exemplified  in  the  charter 
of  the  Atlantic  and  Mediterranean  Banking  and  Navigation  Company 
of  Block  Island,  with  capital  of  $2,000,000.  It  was  to  engage  in  bank- 
ing, build  and  own  ships  and  undertake  a  world-wide  commerce.  It 
did  not  get  beyond  the  stage  of  incorporation. 

The  movement  was  also  attended  with  numerous  banking  laws.  The 
first  bank  chartered  in  1850,  that  of  the  State  Bank,  provided  for  or- 
ganization by  three  commissioners  appointed  by  the  governor.  The 
stock  was  to  be  apportioned  "as  near  as  may  be  to  the  amount  sub- 
scribed by  each  person  who  shall  in  their  opinion  have  the  ability  and 
disposition  to  make  a  bona  fide  investment".  Most  subsequent  char- 
ters had  a  like  provision.  In  June,  1853,  the  issue  of  fractional  bills 
was  prohibited.  Beginning  in  1854  acts  of  incorporation  were  held 
for  consideration  until  the  session  following  their  presentation.  Mean- 
while in  1849  the  tax  on  banks  had  been  increased  from  twenty-five  to 
thirty  cents  per  $100  of  capital  stock,  and  reserved  profits.  In  1855 
the  rate  was  raised  to  thirty-three  cents. 

The  first  act  of  the  January  session  of  the  legislature  in  1857  re- 
vived the  bank  commissioners  act  of  1836  with  slight  modifications. 
Like  its  prototype,  the  new  act  left  the  whole  question  of  safe  banking 
to  the  discretion  of  the  commissioners.  On  the  request  of  three  officers, 
stockholders  or  creditors,  making  a  statement  under  oath  of  their  inter- 
est, they  were  to  examine  a  bank. 

By  an  act  of  February,  1858,  the  reports  of  banks  were  to  be  made  to 
the  state  auditor  and  the  law  still  maintains.  The  bank  commissioners 
in  January,  1858,  reported  that  they  had  enjoined  the  Tiverton  Bank, 
the  Fall  River  Bank,  the  Farmers  Bank  of  Wickford,  the  Bank  of 
South  County  of  Waikefield,  the  Hopkinton  Bank  of  Westerly,  and  the 
R.  I.  Central  Bank  of  East  Greenwich.  The  first  two  had  gotten  into 
the  hands  of  outside  owners,  the  capital  was  made  of  bogus  notes  and 
other  securities  equally  unsatisfactory.  The  Farmers  Bank  had  bills 
in  circulation  much  in  excess  of  their  recorded  amount  and  the  bills 
of  both  banks  seemed  likely  to  be  a  total  loss.  The  banks  of  South 
County  and  Hopkinton,  in  an  endeavor  to  make  large  dividends,  had 
speculated  in  weak  western  land  securities,  and  were  then  totally  un- 
able to  redeem  their  largely  inflated  circulation,  though  the  commis- 
sioners hoped  to  do  so  in  the  course  of  time.  The  aggregate  capital  of 
these  banks  was  $886,311.86,  their  circulation  was  $553,500,  their 
specie  holdings  were  $9,150. 

These  conditions  were  partly  due  to  the  suspension  of  specie  pay- 
ments by  most  of  the  banks  of  Rhode  Island  on  September  28,  1857. 
The  banks  already  weak  added  heavily  to  their  circulation.  The 
Hopkinton  Bank,  with  a  capital  of  $50,000,  had  issued  $49,223  in  bills, 
the  R.  I.  Central,  with  $496,000  capital,  had  $386,700  outstanding,  and 


50  ChxVrtered  Banking  in  Rhode  Island. 

specie  of  only  $7.86.  The  banks  of  Providence,  thirty-nine  in  num- 
ber, had  capital  $14,489,000,  circulation  $2,595,900,  and  specie 
$211,500.  The  country  banks,  fifty-nine  in  number,  had  capital 
$6,367,700,  circulation  $2,748,700,  and  specie  $118,200.  This  was  in 
May,  1857. 

The  banks  were  thus  unprepared  for  the  heavy  demands  made  on 
them  during  the  summer.  The  press  had  been  for  months  warning 
them  of  their  excessive  issue  of  bills.  The  bond  deposit  system  of  New 
York  maintained  its  bills  in  high  standing  while  the  mismanagement 
of  the  banks  above  mentioned  discredited  all  Rhode  Island  bills.  The 
state  as  a  whole  thus  got  the  reputation  of  these  institutions,  which 
scattered  "among  people  of  other  states  a  circulation  which  our  own 
people  will  not  take".  The  New  York  Herald  asserted  that  Rhode 
Island  was  "up  to  its  eyes"  in  railroad  securities,  taken  for  circula- 
tion to  be  distributed  in  the  western  states.  Reckoning  the  loans  on 
such  securities  at  the  par  value  of  the  collateral,  however,  it  appeared 
that  Rhode  Island  banks  held  $651,000  of  them.  The  real  amount, 
allowing  for  the  margin,  was  probably  about  $400,000— a  comparative- 
ly small  sum  when  compared  with  the  total  loans  of  $29,000,000. 

On  September  21st  the  bankers  met  and  recommended  a  slight  in- 
crease in  loans.  The  situation  was  becoming  tense.  Two  weeks  had 
passed  without  the  sale  of  a  single  yard  of  print  cloth.  Said  the  Jour- 
nal on  September  28th,  "There  never  before  were  two  such  weeks  as 
closed  upon  the  business  of  Providence  last  Saturday.  Money  con- 
tinues at  unmitigated  rates,  although  the  demand  slackens  under  the 
impossibility  of  obtaining  discounts.  There  is  hardly  any  cotton  in 
the  market.  The  manufacturers  are  working  down  their  stocks  with 
no  disposition  to  renew  them  under  present  circumstances.  It  is  impos- 
sible longer  to  raise  money  to  pay  labor  and  a  dreary  winter  is  before 
us".  On  December  24th  there  were  502,291  spindles  and  9,661  hands 
idle  in  the  state.  Of  the  216,824  spindles  and  4,070  hands  at  work 
most  of  them  were  on  from  one-half  to  three-quarters  time.  Many 
attributed  the  severe  suffering  in  Rhode  Island  to  the  inferiority  of 
corporate  management  as  compared  with  personal  management.  The 
difference  was  that  between  agency  and  ownership,  and  doubtless  in 
the  then  newness  of  the  former  system,  there  was  much  truth  in  such 
assertions. 

There  had  been  much  opposition  to  suspending,  and  when  on  Sep- 
tember 28th  a  meeting  was  called  for  the  purpose,  six  of  the  Provi- 
dence banks  were  absent.  They  were  the  Merchants,  the  Providence, 
the  Bank  of  Commerce,  the  Union,  the  What  Cheer  and  the  Lime  Rock. 
Most  of  them  were  among  the  strongest  of  the  local  institutions. 
Thirty-three  banks  met  and  of  those  present  twenty-one  voted  for  sus- 
pension.    The  other  banks  were  forced  to  follow  soon  afterwards. 


Chartered  Banking  in  Rhode  Island.  61' 

Providence  was  a  creditor  city  in  the  south  and  west,  but  the  suspen- 
sion in  Baltimore  and  Philadelphia  reduced  its  available  resources, 
while  it  owed  New  York  about  as  much  as  New  York  owed  it.  New 
York  contracted  its  loans  at  the  rate  of  $4,000,000  a  week.  The  fail- 
ures thus  caused  involved  Providence  merchants,  and  Providence 
banks  extended  accommodations  as  far  as  possible  to  New  York  houses, 
when  they  could  not  get  loans  at  home.  Despite  the  large  sums  due 
from  the  south  and  west,  these  discounts  turned  exchange  against 
Providence.  On  September  30th  rates  as  high  as  twenty-four  per  cent, 
were  offered  by  borrowers  and  refused.  On  October  7th  it  was  esti- 
mated that  Providence  banks  had  $8,500,000  due  to  them  and  maturing 
from  time  to  time  at  specie  paying  points,  and  a  net  circulation  in  the 
hands  of  the  public  of  $1,100,000.  It  was  thought,  therefore,  that 
their  bills  would  not  fall  below  one  per  cent,  discount,  but  the  suspen- 
sion of  the  New  York  banks  on  October  15th  ended  the  hope.  Local 
banks  contracted  their  loans  $1,500,000  in  less  than  two  months,  and 
by  December  the  reduction  exceeded  $3,000,000. 

Precisely  the  same  expedients  were  attempted  in  1857  as  had  been 
adopted  in  1837,  but  the  lack  of  harmony  among  the  banks  made  it 
impossible  to  enforce  them.  Be*tween  the  .time  of  suspension  of  the 
Providence  and  the  New  York  banks  many  of  the  former  which  had 
deposits  in  New  York  sold  specie  checks  on  such  deposits  at  a  good 
premium. 

When  the  worst  of  the  crisis  was  over  the  causes  for  it  were  sought, 
and  among  those  peculiar  to  local  banks  that  most  condemned  was  the 
long  period  of  credit.  Print  cloths  were  sold  on  eighteen  months' 
credit.  Eight,  ten  and  twelve  months'  discounts  were  common,  and 
those  under  four  months  were  rare.  A  tacit  approval  of  a  six  months' 
period  for  credits  as  a  maximum  was  for  a  time  observed.  Others 
found  the  cause  in  the  association  of  banks  of  discounts  with  banks 
issuing  bills.  A  meeting  at  the  Providence  Board  of  Trade  advo- 
cated state  issues  of  bills,  to  be  loaned  to  the  banks  on  deposit  of  two- 
thirds  public  securities  and  one-third  bullion.^ 

In  January,  1858,  Rhode  Island  banks  resumed  specie  payment.  At 
a  session  of  the  legislature  in  the  same  month  some  new  banking  laws 
were  passed.  The  whole  amount  of  debts  that  a  bank  might  owe  exclu- 
sive of  deposits  was  restricted  to  sixty-five  per  cent,  of  its  capital. 
Circulation  was  also  limited  to  sixty-five  per  cent,  of  the  capital  stock. 
Neither  of  these  restrictions  affected  the  then  solvent  banks. 

In  1860  the  only  cloud  on  the  horizon  was  that  of  secession.  Pros- 
perity had  quickly  returned,  but  was  almost  as  quickly  dissipated  by 
the  outbreak  of  the  war.  During  the  first  year  of  conflict  Providence 
banks  took  $460,000  of  government  obligations.     In  December,  1861, 

'Providence  Journal,  Sept.  to  Dec,  1857,  passim. 


52  Chartered  Banking  in  Rhode  Island. 

they  followed  the  New  York  banks  and  suspended  specie  payment. 
The  enabling  act,  passed  March  7th,  1865,  prescribed  the  process  of 
transfer  of  the  state  banks  from  the  state  system  into  the  national  bank 
system.  The  act  provided  for  the  redemption  of  their  circulation  by 
periods  of  six  months,  and  they  paid  a  tax  of  one-half  per  cent,  on  all 
that  remained  outstanding  until  the  amount  was  reduced  to  $8,000  for 
each  bank,  when  the  tax  was  to  cease.  Soon  afterward  a  tax  of  ten 
per  cent,  was  imposed  by  national  law  on  all  state  bank  issues  after 
July  1,  1866.  In  November  of  1865,  only  fourteen  of  the  eighty-six 
state  banks  remained.  In  January,  1867,  the  local  taxes  on  the  capital 
stock  of  state  banks  were  repealed.  In  1872  the  liability  of  stock- 
holders was  limited  to  double  the  par  value  of  the  stock  held.  The 
state  since  1791  had  issued  117  charters  for  new  banks  with  an  author- 
ized capital  of  $34,750,000. 

FOURTH    PERIOD— 1865-1900. 

This  period  has  certain  distinguishing  marks  through  which  it 
stands  in  sharp  contrast  to  all  previous  periods.  Its  two  most  marked 
features  are  the  rise  and  decadence  of  the  national  banking  system, 
in  so  far  as  it  had  for  its  aim  banking  by  means  of  circulation  based 
on  government  securities,  and  the  rise  and  success  of  the  state  trust 
company  system,  the  business  of  which  has  been  confined  almost  wholly 
to  banking  by  means  of  deposits.  A  third  feature  common  to  both  of 
these  systems,  but  much  more  clearly  marked  in  the  latter  than  in  the 
former,  is  the  relatively  slight  importance  which  capital  stock  plays  in 
the  one  and  is  destined  to  play  in  the  other,  and  the  correspondingly 
increased  importance  which  surplus  funds  must  play  in  both.  As  in 
the  former  period,  the  origin  of  these  phenomena  is  to  be  found  both  in 
the  nature  of  banking  itself  and  in  the  adaptation  of  it  to  its  changing 
economic  environment.  The  perspective  of  these  facts  perhaps  is  too 
short  for  final  conclusions  to  be  reached,  and  our  discussion  too  limited 
to  permit  of  a  detailed  presentation  of  all  the  elements  which  have 
contributed  to  the  results.  The  most  salient  points  group  themselves 
naturally  around  the  three  topics  of  circulation,  deposits  and  capital, 
and  are  especially  concerned  with  the  local  industrial  conditions  which 
have  affected  the  shifting  of  the  basis  of  the  banking  business  from 
capital  to  deposits. 

The  amount  of  circulation  of  the  eighty-six  state  banks  in  1864  was 
about  $7,000,000.  This  circulation  was  supplanted  by  that  issued  by 
the  national  banks.  The  latter,  because  of  restrictions  upon  its  issue, 
had  less  earning  power  than  an  equal  amount  of  state  bank  currency, 
but  the  state  currency  was  limited  to  sixty-five  per  cent,  of  the  capital 
stock  of  the  banks,  while  the  national  currency  was  limited  to  ninety 
per  cent,  of  the  amount  of  United  States  bonds  deposited  as  a  basis 
for  it.     The  national  currency  had  an  additional  merit  in  that  its 


Chartered  Banking  in  Rhode  Island.  63 

redemption  was  not  a  first  charge  upon  the  general  assets  of  thebanks, 
but  was  assumed  by  the  government.  The  lesser  degree  of  profitable- 
ness which  it  offered  was  thus  offset  by  a  possible  larger  issue  of  it  and 
an  absence  of  liability  for  its  redemption.  The  demand  liabilities  of 
the  banks  were  thus  greatly  reduced.  Under  the  combined  influence 
of  the  suspension  of  specie  payments  in  1861,  the  resulting  weakness 
of  the  Suffolk  System  of  redemptions  and  the  rapid  depreciation  of 
all  paper  currency,  Rhode  Island  banks  became  so  far  inflationists  as 
to  more  than  double  their  circulation  issues  between  1861  and  1864. 
The  additional  emphasis  given  to  inflation  by  the  character  of  the 
national  bank  currency  just  noted,  found  here  as  elsewhere  a  ready 
response.  The  national  banks  by  1870  had  issued  over  $12,000,000 
of  bank  notes. 

The  issue  of  these  notes  had  an  effect  upon  the  amount  of  available 
local  capital  the  reverse  of  that  which  had  resulted  from  all  previous 
large  issues  of  circulation,  because  under  the  national  banking  system 
they  were  offset  by  the  amount  of  local  capital  necessarily  loaned  to 
the  government  in  the  purchase  of  government  bonds.  Inasmuch  as 
the  bonds  were  usually  at  a  premium  and  only  ninety  per  cent,  of 
their  par  value  could  be  issued  in  the  form  of  notes,  there  was  even  less 
capital  left  for  local  purposes  with  circulation  than  without  it.^  Be- 
cause of  this  fact  local  banking  funds  in  1870  were  about  $8,000,000 
less  than  they  had  been  in  1864.  The  effect  of  this  contraction  in  a 
community,  the  business  of  which  was  so  dependent  on  credit,  was 
marked.  It  would  have  been  more  severe  had  not  local  needs  been 
partly  supplied  by  the  state  banks,  the  newly  organized  trust  com- 
panies and  savings  banks. 

When  a  few  years  later  national  bank  currency  became  unprofitable 
and  was  gradually  retired,  the  national  banks  which  had  large  invest- 
ments in  government  bonds  were  compelled  to  retain  the  bonds  at  a 
low  rate  of  interest,  or  in  selling  them  to  re-introduce  into  the  local 
field  an  equal  amount  of  banking  capital,  the  uses  for  which  had 
already  been  supplanted  by  rapidly  increasing  bank  deposits.  Such 
national  banking  capital  therefore  appeared  to  be  redundant.  And  it 
seemed  the  more  redundant  because  by  1890  the  national  banks,  with 
$20,000,000  of  capital,  on  which  they  must  earn  dividends,  was  com- 
pared with  the  trust  companies,  with  about  $2,000,000  of  capital,  had 
less  than  fifty  per  cent,  more  of  deposits  than  the  latter. 

That  portion  of  bank  deposits  which  consists  of  small  amounts  of 

'In  1864  the  loanable  banking  fund  had  consisted  approximately  of  $21,200,- 
000  banking  capital,  $1,500,000  surplus.  $6,900,000  circulation  and  $6,600,000 
deposits— total  $36,200,000.  In  1870  it  consisted  of  $20,300,000  national  banking 
capital,  less  $13,700,000  invested  in  government  bonds,  or  $6,600,000  net  capital, 
$3,300  000  surplus,  $12,400,00  circulation,  and  $6,100,000  deposits— total  $28,400, 
000.  The  difference  in  favor  of  the  state  bank  system  with  an  equal  amount  of 
capital  was  about  $8^000,000.  -^..^^ 


UNIVERSITY 


Chari-ered  Banking  in  Rhode  TsLAiror  55 


idle  capital  or  of  savings  played  no  important  part  in  Rhode  Island 
banking  until  after  1850.  As  late  as  1860  such  deposits  were  largely 
confined  to  savings  banks.  At  the  close  of  the  war  they  began  for  the 
first  time  to  constitute  an  important  portion  of  the  assets  of  banks  of 
discount  and  demand  deposits. 

The  trust  companies  entered  the  local  field  at  this  point  in  the 
development  of  banking.  They  combine  the  functions  of  saving  banks 
with  the  functions  of  banks  of  discounts  and  demand  deposits.  They 
have  had  in  Rhode  Island  a  development  paralleled  by  that  in  no 
other  state.  They  were  free  from  the  taxes  on  deposits  and  capital 
which  were  imposed  upon  the  national  banks.  Their  beginning  was 
opportune,  because  it  coincided  with  the  period  of  reconstruction. 
Being  at  first  very  shrewdly  managed,  they  escaped  the  serious  losses 
incident  to  the  panic  of  1873.  The  first  charter  granted  was  that  of 
the  Rhode  Island  Hospital  Trust  Company  in  May,  1867.  Incident- 
ally we  may  note  that  this  was  the  first  state  charter  upon  which  was 
imposed,  in  lieu  of  a  tax,  the  obligation  to  devote  a  certain  portion  of 
its  profits  to  charitable  purposes.  The  company  was  required  to  pay 
one-third  of  its  net  income  over  six  per  cent,  to  the  Rhode  Island  Hos- 
pital as  long  as  the  legislature  should  grant  no  similar  charter  to  par- 
ties other  than  its  incorporators.  It  was  a  bank  without  the  power  of 
issuing  circulation.  It  was  authorized  to  "receive  and  hold  money 
upon  optional  terms",  "at  interest  agreed  upon",  and  to  invest  such 
money  in  such  ways  as  the  directors  deemed  "prudent." 

It  was  required  to  deposit  with  the  state  treasurer  bonds  of  the  New 
England  states,  New  York  or  the  United  States  to  the  value  of  twenty 
per  cent,  of  its  capital.  This  deposit  exempted  the  company  from  all 
liability  for  its  acts  as  executor,  administrator,  guardian,  assignee  or 
receiver,  in  all  of  which  capacities  it  was  authorized  to  act.  It  also 
exempted  individuals  acting  in  such  capacities  from  liability  on  all 
deposits  left  with  the  trust  company.  In  1870  the  company  had 
$2,000,000  of  deposits;  in  ten  years  its  deposits  exceeded  $6,000,000. 
Soon  afterward  competition  began ;  in  1900  there  w^re  ten  active  trust 
companies  in  the  state,  although  the  business  was  practically  confined 
to  six  of  them.^  Their  capitals  amounted  to  $4,107,600;  their  surplus 
to  $3,400,000 ;  their  deposits  to  $40,200,000.  In  July,  1901,  their  de- 
posits amounted  to  $45,300,000. 

The  state  banks  had  paid  interest  on  certain  portions  of  their 
deposits.  The  trust  companies  began  at  once  to  pay  interest  on  both 
time  and  demand  deposits.  At  the  same  time  the  national  banks  were 
paying  a  tax  of  one  and  one-half  per  cent,  on  deposits  and  continued 
to  do  so  until  1883.  The  small  banking  capital  of  the  trust  companies, 
their  liberal  charter  powers  and  the  facilities  which  they  could  offer  to 

'The  Newport  Trust  Company  was  organized  in  1902. 


56  Chartered  Banking  in  Rhode  Island. 

depositors,  drew  to  them  a  rapidly  growing  deposit  account.  The 
national  banks  refused  to  pay  interest  on  demand  deposits  until  they 
were  compelled  to  do  so  by  their  rapidly  increasing  assets.  Indeed,  in 
order  to  furnish  accommodations  to  their  customers,  they  were  fre- 
quently obliged  to  borrow  from  the  trust  companies,  at  good  rates  of 
interest,  the  very  funds  which  the  latter  had  attracted  from  them. 
Within  the  ten  years  from  1890  to  1900  the  deposits  in  the  national 
banks  of  the  state  increased  from  $16,700,000  to  $17,500,000,  about  five 
per  cent.  Within  the  same  period  the  deposits  in  trust  companies 
increased  from  $12,000,000  to  over  $40,000,000,  about  330  per  cent. 
Savings  banks  deposits  have  increased  about  250  per  cent,  since  1870. 

This  enormous  total  of  small  sums  of  idle  capital  in  the  form  of 
deposits  has  within  the  past  thirty  years  taken  the  place  in  the  field  of 
banking,  which  for  seventy  years  previous  to  1865  was  occupied  almost 
wholly  by  banking  capital  in  the  form  of  capital  stock.  Within  the 
last  thirty  years  circulation  banking  has  ceased  also  to  be  important. 
The  rise  of  deposit  banking,  therefore,  is  clearly  the  chief  cause  of  the 
redundancy  of  national  banking  capital  in  Rhode  Island,  but  it  is  not 
the  only  cause.  The  economic  revolution  which  has  been  accomplished 
in  the  same  period  has  to  a  peculiar  degree  emphasized  and  accelerated 
that  redundancy. 

The  industrial  supremacy  which  Rhode  Island  retained  until  1870 
was  dissipated  by  the  panic  of  1873,  and  in  the  reorganization  of 
industry  which  has  since  occurred,  the  proportion  of  circulating  capi- 
tal to  fixed  capital  has  decreased,  and  thus  the  demand  for  credit  in 
the  form  of  discounts  has  not  increased  at  the  same  rate  as  general 
business.  The  period  of  contraction  which  began  soon  after  the  war 
expressed  itself  in  constantly  falling  prices.  It  found  Rhode  Island 
as  well  as  other  states  doing  business  on  a  line  of  credits  inflated  to 
correspond  with  war  prices  and  an  expectation  of  a  continuance  of 
war  profits.  Declining  profits  were  met  by  increased  borrowings  to 
carry  the  load  of  accumulating  products.  Rates  of  money  advanced 
rapidly  and  the  crj^sis  was  reached  in  1873.  The  failure  of  Jay  Cooke 
&  Co.  in  September  was  followed  by  a  period  of  suspense  and  uncer- 
tainty, during  which  the  character  of  manufacturing  paper,  based 
upon  the  inflated  values  above  noted  and  carried  from  year  to  year, 
was  keenly  scrutinized.  Rates  of  interest  in  the  locdl  market  rapidly 
advanced  from  ten  to  twenty  per  cent.  In  the  latter  part  of  October 
Rhode  Island  was  shocked  to  its  industrial  center  by  the  suspension 
of  the  A.  &  W.  Sprague  Manufacturing  Company  of  Providence,  and 
Hoyt,  Sprague  &  Company  of  New  York.^    The  assets  of  the  Spragues 

'Various  otlier  concerns  dependent  upon  Sprague  capital  or  interests  were 
involved  in  this  suspension. 


Chari-ered  Banking  in  Rhode  Island.  57 

were  appraised  at  $19,495,000 ;  the  liabilities  at  $11,475,000.^  The 
business  interests  of  the  Spragues  were  widely  extended.  The  estate 
as  a  whole  was  put  into  insolvency,  and  though  some  portions  of  it 
were  solvent  the  severe  contraction  of  business  during  the  next  few 
years  entailed  enormous  losses  upon  the  creditors. 

The  Cranston  Savings  Bank,  to  which  the  Spragues  owed  $1,130,000, 
closed  its  doors.  The  Franklin  Savings  Bank  of  Providence,  to  which 
they  owed  $750,000,  went  down  in  the  ruins.  The  Sprague  obliga- 
tions to  the  Globe  National,  the  Second  National  and  the  First  Na- 
tional Banks  were  nearly  three-quarters  of  a  million  dollars  each.  The 
Globe  reduced  its  capital  from  $600,000  to  $300,000.  The  Second  re- 
duced its  capital  from  $500,000  to  $300,000.  The  First  reduced  its 
capital  from  $600,000  to  $500,000,  and  all  of  them  assessed  their  stock- 
holders in  order  to  partly  recoup  their  losses.  For  more  than  twelve 
years  the  property  was  the  subject  of- litigation  in  the  courts  and  dur- 
ing that  time  idle  mills  were  sold  at  prices  about  one-sixth  of  their  ap- 
prised value  as  going  concerns. 

The  enormous  sums  involved  in  this  failure  astounded  the  whole 
country.  It  had  no  parallel  in  the  industrial  history  of  the  United 
States.  It  gave  Rhode  Island  a  blow  from  which  her  industry  has 
never  recovered.  The  subsequent  failures  which  can  be  traced  to  this 
as  their  primary  cause  extended  over  a  period  of  more  than  twenty 
years.  The  unfortunate  craze  for  speculation  in  land  soon  after  the 
war  began  to  reap  its  reward  during  the  years  preceding  "Resump- 
tion ' '.  It  resulted  in  further  losses  to  the  banks.  The  City  Savings 
causes  resulted  in  further  losses  to  the  banks.  The  City  Savings 
Bank  suspended  payment  for  a  time.  The  Rhode  Island  Savings 
Bank  and  the  Union  Savings  Bank  went  into  liquidation.  The  Paw- 
tucket  Institute  for  Savings,  the  Franklin  Savings  Bank  of  Paw- 
tucket  and  the  Providence  County  Savings  Bank  were  practically 
reorganized.  The  Grocers  and  Producers  Bank  failed.  The  State 
Bank  reduced  its  capital.  The  Northern  and  the  Union  Banks  re- 
duced their  capital  and  later  went  into  liquidation.*  Scarcely  a  bank 
in  the  state  escaped  serious  loss.  The  whole  period  was  one  of  note- 
worthy industrial  depression.  The  demand  for  capital  became  less 
active,  and  although  the  banks  had  suffered  so  severely  they  were  com- 
pelled to  seek  a  field  for  the  investment  of  even  their  reduced  resources 
outside  the  state.  Litigation  and  liquidation  entailed  losses  upon 
them  in  addition  to  those  which  they  at  first  suffered,  and 
from  which  they  have  not  yet  recovered.  Between  1889  and  1898 
eight  failures  have  occurred  in  Rhode  Island  involving  liabilities  of 
$10,000,000.  A  reconstruction  and  reorganization  of  the  state 's  bank- 
ing system  has  been  the  slow  but  sure  attendant  of  these  events. 

'Journal,  Nov.  3rd,  1873. 
«R.  I.  Bank  Reports. 


58  Chartered  Banking  in  Rhode  Island. 

Thus  while  deposits  were  supplanting  banking  capital  as  a  means  of 
discount,  while  the  conditions  incident  to  retiring  national  bank  circu- 
lation were  slightly  increasing  the  amount  of  national  banking  capital 
available  for  the  local  field,  and  while  its  earnings  were  being  reduced 
by  the  competition  of  the  trust  companies,  the  industrial  convulsions 
of  1873,  which  had  destroyed  some  of  it,  was  accompanied  and  fol- 
lowed by  a  marked  contraction  of  the  field  that  remained  for  its  use. 
From  a  series  of  cumulative  events  a  large  amount  of  local  national 
banking  capital  had  ceased  to  have  any  reason  for  existence.  During 
a  series  of  years,  beginning  about  1880,  the  average  return  to  the 
stockholders  in  the  form  of  dividend  was  less  than  three  per  cent. 
About  1890,  Marsden  J.  Perry,  of  Providence,  recognizing  this  condi- 
tion of  affairs,  began  to  advocate  a  system  of  consolidation  and  liqui- 
dation of  national  banks.  Others  have  aided  in  the  movement.  From 
1890  to  1901  inclusive  twenty  national  banks  have  retired  from  busi- 
ness. The  total  capital  stock  has  been  reduced  from  about  $20,000,000 
to  $13,000,000.     Local  banking  has  been  revolutionized.^ 


At  the  beginning  of  this  chapter  we  saw  a  community,  imbued  with 
inflationist  ideas,  trying  to  solve  the  problem  of  furnishing  a  currency 
both  elastic  and  convertible,  adequate  to  the  purposes  of  discount  and 
circulation  and  based  partly  upon  nothing  and  partly  upon  contingent 
assets.  We  saw  that  John  Brown  and  his  associates  partly  solved  the 
problem  by  the  harsh  bank  process  power  and  the  expedient  of  short 
time  notes,  which  converted  a  large  portion  of  the  contingent  assets  of 
the  banks  into  quick  assets.  At  the  same  time  we  saw  that  the  nature 
of  the  industrial  organization  and  the  business  relations  of  the  banks 
themselves  combined  to  quickly  dissipate  the  thought  of  a  fiat  medium 
from  the  minds  of  business  men.  Currency  problems  were  then  con- 
fined to  the  state. 

At  the  close  of  the  century  we  find  the  problem  transferred  to  the 
national  field,  and  although  some  progress  has  been  made  we  are  still 
far  from  knowing  how  to  furnish  a  currency  elastic,  safe  and  adapted 
to  the  diverse  needs  of  the  country. 

We  have  seen  the  chief  reason  for  the  existence  of  the  national 
banking  system  gradually  disappear,  because  bonds  which  the  banks 
first  purchased  have  been  taken  by  private  capitalists,  and  because  the 
rising  prices  of  them  and  falling  rates  of  interest  have  combined  to 

^As  to  the  inter-bank  facilities,  it  may  be  noted  that  the  clearing  system 
which  had  centered  around  the  Merchants  National  Bank  and  the  National 
Bank  of  North  America  was  simplified  by  the  establishment  of  a  clearing 
house  on  July  1st,  1888.  The  Union  Trust  Company  began  a  system  of  branch 
banks  in  1891.  At  present  the  Industrial  Trust  Co.  has  five  branches  and  the 
Manufacturers  Trust  Co.  has  one. 


Chartered  Banking  in  Rhode  Island.  59 

render  national  bank  circulation  unprofitable.  The  recent  modifica- 
tion of  the  laws  affecting  it  have  as  yet  scarcely  passed  beyond  the 
stage  of  experiment. 

We  saw  discount  banking  based  by  force  of  circumstances  almost 
wholly  upon  banking  capital.  After  having  done  its  part,  both  to  the 
state  and  national  bank  system  we  find  that  capital  disappearing  be- 
cause of  changed  economic  conditions.  In  its  place  we  see  an  intricate 
system  of  credits  granted  by  means  of  deposits. 

We  saw  at  the  outset  that  circulation  was  a  dangerous  means  of  dis- 
counting, because  it  was  a  demand  liability  based  on  a  non-demand 
asset.  We  see  to-day  precisely  the  same  danger  existing  in  the  large 
use  of  deposits  as  a  means  of  discounting  because  they  are  a  demand 
liability  dependent  on  non-demand  assets.  The  danger  at  first  was 
avoided  by  an  artificial  method  of  converting  slow  into  quick  assets. 
Whether  or  not  the  present  danger  will  be  avoided  depends  upon  the 
proportion  of  the  banks'  investments  which  can  properly  be  classed  as 
quick  assets.  But  it  must  not  be  forgotten  that  the  large  accumulation 
of  wealth  during  the  century  has  become  the  basis  of  countless  securi- 
ties of  a  standard  value  in  an  almost  worldwide  market.  These  are 
instantly  convertible.  Hence  while  we  may  compare  the  demand  cur- 
rency of  1800  and  the  demand  deposits  of  1900  as  possessing  similar 
elements  of  danger,  no  comparison  is  possible  between  the  means  then 
and  now  available  for  providing  against  such  dangers. 


60 


Chartered  Banking  in  Rhode  Island. 


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62 


Chartered  Banking  in  Rhode  Island, 


TRUST  COMPANIES. 


01 

09 

t» 

09 

.2 

a 

u 
m 

V 

> 

o 

"5. 

St 

3 

a 

3 

'3 

a 

c 

<0 

J3 

01 

u 

o 
ta 

6 

W 

Q 

3 

Q 

u 
a> 

6 

o 

1870 

1 

$500 

$   5 

$1,984 

$2,283 

t   80 

1880 

1 

800 

33 

6,410 

6,243 

763 

$"237 

1890 

6 

2,164 

563 

12.073 

13,618 

848 

339 

1900 

'11 

4,108 

3,379 

40,456 

2V622 

992 

47,155  1  2,713 

1,588 

'Including  1  in  liquidation  with  capital  of  $282,000. 


NATIONAL  BANKS. 


Year 

B) 

c 
ta 

n 

0 

1 

2 

O 

at 

3 

"3. 

;-. 
3 

to 

a 

o 

3 
o 

O 

en 
O 

a 

0) 

B 
CD 
O 

1870  

1890 

62 
59 
42 
30 

$20,365 
20,214 
14,676 
13,251 

$3,267 
6,282 
5,006 

$12,378 
3,098 
5,185 

$6,076 
16,788 
17,547 

$22,867 
36,664 

1900 

1901 

28,744 

SAVINGS  BANKS. 


0] 

.M 

a> 
'3 

Year 

tM 

a 

o 

4> 

0 

Q 

z 

1850 

7 
21 

$1,495 

1860 

t. 

9,164 

1870  

26 
39 

30,708 

1880  _ 

44,756 

1890 

38 
34 

63,719 

1900 

74,847 

14  DAY  USE 

RETURN  TO  DESK  FROM  WHICH  BORROWED 

LOAN  DEPT. 

This  book  is  due  on  the  last  date  stamped  below,  or 

on  die  date  to  which  renewed. 
I  <,  Renewed  books  are  subject  to  immediate  recall. 


^°mrUJp 

Ktv^'D  LD 

JUNlu'64-9/\M 

T  T^  01  A    ^rv™  1 1  -CQ                          Univetsity  of  California 

YD  05594 


1 08053 


